Medicaid Financing: Federal Oversight Initiative Is Consistent
with Medicaid Payment Principles but Needs Greater Transparency
(30-MAR-07, GAO-07-214).
The costs of Medicaid--the federal-state program financing health
care for about 60 million low-income people--totaled about $317
billion in fiscal year 2005. Increasing budgetary pressures have
created tension between the states and the federal government, in
part because some states have used inappropriate financing
arrangements to collect federal matching funds when payments were
not retained by the providers. In August 2003, the federal
Centers for Medicare & Medicaid Services (CMS) began an
initiative to end inappropriate arrangements. GAO was asked to
examine the (1) number, and fiscal effects, of states ending
particular financing arrangements; (2) extent to which CMS's
initiative represents a change in agency approach or policy; and
(3) transparency and consistency of the initiative. For states
ending arrangements, GAO surveyed state officials, reviewed CMS
documents, and interviewed CMS and state officials.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-07-214
ACCNO: A67564
TITLE: Medicaid Financing: Federal Oversight Initiative Is
Consistent with Medicaid Payment Principles but Needs Greater
Transparency
DATE: 03/30/2007
SUBJECT: Cost sharing (finance)
Federal regulations
Federal social security programs
Federal/state relations
Financial management
Health care costs
Health care programs
Medicaid
Payments
Program evaluation
Questionable payments
Executive agency oversight
Transparency
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GAO-07-214
* [1]Results in Brief
* [2]Background
* [3]Twenty-nine States Ended Financing Arrangements, with Uncert
* [4]Ended Arrangements Involved Supplemental Payments Not Fully
* [5]Fiscal Effects Are Uncertain Because Most States Were Seekin
* [6]CMS's Initiative Departs from Past Approach and Is Consisten
* [7]CMS's Initiative Departs from Past Oversight Approach
* [8]States Report That CMS Has Changed Certain of Its Policies o
* [9]A Federal Court Found a Similar Action to Be Within CMS's Au
* [10]CMS's Initiative Lacks Transparency, Raising Concerns about
* [11]CMS's Initiative Has Lacked Transparency
* [12]CMS Did Not Provide Guidance about Its Specific Approval
Sta
* [13]CMS Did Not Always Document Its Determinations or Make
Them
* [14]Lack of Transparency Has Raised Concerns among States about
* [15]Conclusions
* [16]Recommendations for Executive Action
* [17]Agency Comments and Our Evaluation
* [18]Appendix I: Methodology for Determining the Number of States
* [19]Appendix II: Methodology for Analyzing CMS Case Files
* [20]Appendix III: Comments from the Centers for Medicare & Medic
* [21]Appendix IV: GAO Contact and Staff Acknowledgments
* [22]GAO Contact
* [23]Staff Acknowledgments
* [24]Related GAO Products
* [25]Order by Mail or Phone
Report to the Committee on Finance, U.S. Senate
United States Government Accountability Office
GAO
March 2007
MEDICAID FINANCING
Federal Oversight Initiative Is Consistent with Medicaid Payment
Principles but Needs Greater Transparency
GAO-07-214
Contents
Letter 1
Results in Brief 5
Background 8
Twenty-nine States Ended Financing Arrangements, with Uncertain Fiscal
Effects 13
CMS's Initiative Departs from Past Approach and Is Consistent with
Medicaid Payment Principles 21
CMS's Initiative Lacks Transparency, Raising Concerns about Consistent
Review of State Financing Arrangements 27
Conclusions 34
Recommendations for Executive Action 34
Agency Comments and Our Evaluation 35
Appendix I Methodology for Determining the Number of States Ending
Financing Arrangements 38
Appendix II Methodology for Analyzing CMS Case Files 40
Appendix III Comments from the Centers for Medicare & Medicaid Services 42
Appendix IV GAO Contact and Staff Acknowledgments 48
Related GAO Products 49
Tables
Table 1: Financing Arrangements Ended, by State and Type of Supplemental
Provider Payment Involved, from August 2003 through August 2006 15
Table 2: Number of States Planning or Implementing Certain Alternative
Arrangements for Financing the Nonfederal Share of Payments, as of October
2006 19
Figure
Figure 1: Inappropriate State Financing Arrangement in Which Provider Did
Not Retain the Full Supplemental Payment 11
Abbreviations
CMS Centers for Medicare & Medicaid Services
CPE certified public expenditure
DSH disproportionate share hospital
HCFA Health Care Financing Administration
IGT intergovernmental transfer
UPL upper payment limit
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separately.
United States Government Accountability Office
Washington, DC 20548
March 30, 2007
The Honorable Max Baucus
Chairman
The Honorable Charles Grassley
Ranking Minority Member
Committee on Finance
United States Senate
Growing pressures on federal and state budgets have increased tensions
between the federal government and the states regarding Medicaid, the
joint federal-state health care financing program for about 60 million
individuals, including low-income children, families, and aged or disabled
individuals. The federal government and the states share in the cost of
the program, which in fiscal year 2005 totaled about $317 billion.^1 The
Centers for Medicare & Medicaid Services (CMS)--the federal agency
responsible for overseeing states' programs--has an important role in
ensuring that states comply with certain statutory Medicaid payment
principles when claiming federal reimbursements for payments made to
institutional and other providers that serve Medicaid beneficiaries. For
example, Medicaid payments must be "consistent with efficiency, economy,
and quality of care,"^2 and states must share in any reported Medicaid
costs in proportions established according to a statutory formula.^3 In
recent years, tensions have arisen between the federal government and
states with regard to CMS's actions to oversee the appropriateness of
Medicaid provider payments for which states have sought federal matching
reimbursement, including concerns over whether states were appropriately
financing their share, that is, the nonfederal share of the payments.
We and others have reported that some states have inappropriately
established financing arrangements creating the appearance of payments to
government-owned or government-operated providers, such as nursing homes,
in order to obtain additional federal matching funds.^4 These arrangements
involved supplemental payments--payments that states made to providers
that were separate from and in addition to those made at a state's
standard Medicaid payment rate. The supplemental payments connected with
these arrangements were illusory, because states required the government
providers to return part or all of them to the states. States could then
use the money to fund the nonfederal share of other Medicaid expenditures.
Such arrangements effectively increased the federal share of the states'
total Medicaid expenditures because federal funding increased without a
commensurate increase in nonfederal funding. Financing arrangements
involving illusory payments to Medicaid providers have had significant
fiscal implications for the federal government and states. In 2003, we
designated Medicaid as a program at high risk of mismanagement, waste, and
abuse, in part because of concerns about inappropriate financing
arrangements.^5 As states' arrangements involving illusory payments have
come to light, Congress and CMS have taken steps to limit them, including
establishing a regulation estimated to have saved the federal government
approximately $17 billion from fiscal year 2002 through fiscal year 2006.
^1This figure represents estimated combined federal and state Medicaid
expenditures for provider services and administration in fiscal year 2005,
the last year for which data were available.
^242 U.S.C S 1396a(a)(30)(A) (2000).
^342 U.S.C S 1396d(b) (2000).
In August 2003, CMS launched an oversight initiative to review and
evaluate the appropriateness of states' Medicaid payments for which
federal matching reimbursement was sought, by assessing whether states had
financing arrangements that required providers to return payments to the
states. Under this initiative, a state's submission of a proposal to
change provider payments in its state Medicaid plan--the plan approved by
CMS that defines how each state will operate its Medicaid program,
including which populations and services are covered and the rates at
which providers will be paid for serving Medicaid beneficiaries--triggers
CMS scrutiny of the appropriateness of any related financing arrangement.
CMS withholds approval of a proposed state plan amendment until obtaining
satisfactory assurances that a state is ending financing arrangements the
agency finds to be inappropriate. As CMS has carried out this initiative,
concerns have been raised that CMS's policies have not been transparent,
that is, clearly explained and available to interested parties; represent
a change in policy that should have undergone a rule-making process during
which a proposed regulation would have been published for public comment;
and have not been implemented consistently from state to state.
^4A list of related GAO products appears at the end of this report.
^5GAO, High-Risk Series: An Update, [26]GAO-05-207 (Washington, D.C.:
January 2005).
You asked us to review CMS's efforts under its oversight initiative begun
in August 2003, including the process the agency has used and the outcomes
of that process, focusing on states that were required to end Medicaid
financing arrangements that CMS found to be inappropriate. This report
addresses the following questions:
1. How many states have ended Medicaid financing arrangements as a
result of CMS's initiative, and what have been the fiscal effects?
2. To what extent does CMS's initiative reflect a change in
approach or policy for overseeing states' Medicaid financing
arrangements?
3. To what extent has CMS implemented its initiative in a
transparent manner and consistently across states?
To determine the number of states among the 50 states and the District of
Columbia that ended financing arrangements and the fiscal effects of
ending the arrangements under CMS's oversight initiative, we obtained
information from CMS on the financing arrangements that were ended from
August 2003 through August 2006, reviewed CMS's files containing agency
and state documents regarding the ended arrangements, and discussed with
CMS officials the characteristics of and the basis for the agency's
determinations concerning states' arrangements and the potential federal
fiscal effects from states' ending arrangements. To ensure that we had an
accurate count of states that had ended one or more financing
arrangements, we verified this information with each state that, according
to CMS, had ended an arrangement. In addition, we contacted all states not
identified by CMS as having ended an arrangement and asked them whether
they had ended certain financing arrangements as a result of CMS's
initiative. We determined that the information provided by CMS about which
states ended financing arrangements, coupled with confirmation provided by
states, was sufficiently reliable for the purposes of our review. To learn
more about the ended financing arrangements, we sent a questionnaire to,
and obtained responses from 100 percent of, the subset of states that we
determined had ended an arrangement from August 2003 through August 2006.
Our questions sought information and associated documentation to verify
the characteristics of the financing arrangements that the states had
ended; the actions the states had taken or planned to take as a result of
CMS's initiative, including states' proposals to implement different
financing arrangements as an alternative to the arrangements they had
ended; and the potential fiscal effects on state budgets of ending
financing arrangements. We updated our information on the status of
states' plans to implement alternative arrangements in October 2006. We
also obtained additional information about CMS's initiative by
interviewing officials from nearly two-thirds of the states receiving our
questionnaire, including officials from states whose questionnaire
responses required clarification or who requested an interview. We did not
independently validate the information the states provided to us about
fiscal effects. (See app. I for a more detailed description of our
methodology for determining the number of states that ended financing
arrangements.)
To examine the extent to which CMS's initiative reflects a change in
approach or policy for overseeing states' Medicaid financing arrangements,
we reviewed the legal and programmatic bases for CMS's initiative;
reviewed relevant legal opinions and related materials; interviewed CMS
officials concerning CMS's oversight in the past and under the initiative;
reviewed agency and congressional actions to address states' inappropriate
financing arrangements from 1994, when we first reported on these issues,
through November 2006; and reviewed public statements by CMS officials and
CMS documents that discussed the agency's actions under its initiative. In
our questionnaire to the states that ended financing arrangements under
the initiative, we asked whether each state viewed CMS's actions as a
change from the agency's prior approach.
To assess the extent to which CMS's initiative has been implemented in a
transparent manner, we performed a structured review of documentation
contained in CMS's files for the subset of states that had ended financing
arrangements, including examining correspondence and other information
related to each state review under the initiative. We assessed how CMS
communicated to the states that ended financing arrangements its
determinations about financing arrangements and the basis for its
determinations, including assessing the extent to which CMS provided
states with written information on the statutory basis for its
determinations under the initiative. We did not assess the validity of
CMS's determinations that states must end certain financing arrangements,
nor did we compare the basis for these determinations with CMS's approvals
of other financing arrangements it reviewed. (See app. II for further
information on our methodology for analyzing CMS's files.) Through our
questionnaire to the states that ended financing arrangements, we sought
information on their views of CMS's review process, including information
on whether, in the opinion of state officials, CMS explained why the state
should end its financing arrangement, on what basis CMS concluded that the
state should end its financing arrangement, and what guidance--such as
letters to state Medicaid directors or technical guidance manuals--CMS
provided the state on financing arrangements. To assess the consistency of
CMS's reviews under the initiative, we examined information in CMS's files
for evidence of any differences in CMS's reviews of states that ended
financing arrangements, including differences in the concerns that CMS
identified. Because of limitations in the file documents, however, we were
unable to determine whether CMS had treated states that ended financing
arrangements consistently. For example, CMS's files did not contain
records of oral discussions or explanations of relevant differences in the
states' Medicaid programs. Through our questionnaire, we sought the views
of state officials on whether the states that ended financing arrangements
believed CMS had been consistent across states in its reviews. In part to
better understand how CMS's reviews had affected states that ended
financing arrangements, we interviewed officials in nearly two-thirds of
the states that received our questionnaire and who had, for example,
requested an interview or whose responses to the questionnaire needed
clarification. Finally, we interviewed CMS officials about the agency's
review process under the initiative and the basis for its determinations
regarding states' financing arrangements. Our findings, conclusions, and
recommendations are based on the evidence we obtained in reviewing states
that ended financing arrangements as a result of CMS's oversight
initiative. We conducted our review from July 2005 through March 2007 in
accordance with generally accepted government auditing standards.
Results in Brief
From August 2003 through August 2006, 29 states ended Medicaid financing
arrangements that CMS determined to be inappropriate as a result of its
oversight initiative; the fiscal effects of ending such arrangements were
uncertain at the time of our review. The ended financing arrangements
involved supplemental payments made to government-owned or
government-operated health care providers, most often government nursing
homes and hospitals. CMS officials informed us that in all the cases, they
required states to end the financing arrangements because under the
arrangements, government providers did not retain all of the supplemental
payments made to them but instead returned part or all of the payments to
the states. In more than half the cases, we identified documents in CMS's
files confirming that under the arrangements, providers retained less than
the full amounts of the supplemental payments they received. The fiscal
effects on the states and on the federal government of ending such
arrangements remained uncertain at the time of our analysis because nearly
two-thirds of states (19 of 29) that ended financing arrangements were
either planning or implementing different arrangements for financing the
nonfederal share of the related supplemental payments. For example, 10
states were adopting arrangements under which the supplemental payments
would be based on funds expended by government providers and certified as
allowable expenditures for providing Medicaid services to Medicaid
beneficiaries. As of October 2006, only 12 of the 19 states planning or
implementing alternative arrangements had begun seeking federal
reimbursements, and those states faced further CMS review before obtaining
reimbursements.
CMS's initiative reflects a departure from the agency's past oversight
approach and is consistent with Medicaid payment principles requiring, for
example, that payment for services be consistent with efficiency, economy,
and quality of care. In the past, CMS limited states' inappropriate
financing arrangements through means other than determining whether the
individual providers involved were retaining the supplemental payments
made to them. Consequently, CMS previously approved states' financing
arrangements even in some cases where it was aware that the providers did
not retain the full payments. Most states that ended financing
arrangements view CMS's initiative as a change in CMS policy. In response
to our questionnaire, officials in 24 of 29 states that ended financing
arrangements reported that CMS had changed its policy on allowable state
financing; in additional written comments, officials of 6 of these states
expressed concern that CMS objected to provisions it had previously
approved and did so without first notifying states through rule making of
its policy changes. Whether CMS's initiative represents a change in policy
that would require rule making was, as of February 2007, under review in
federal court. In July 2004, Minnesota challenged CMS's disapproval of its
state plan amendment in part on the grounds that CMS should have gone
through rule making before disapproving the state's plan amendment under
the initiative. CMS's disapproval was affirmed by the Administrator in
July 2006. Minnesota officials in September 2006 filed an appeal of the
Administrator's decision in federal court; the appeal was pending as of
February 2007. In another case, unrelated to the initiative, in which a
state challenged CMS's disapproval of a state plan amendment involving an
inappropriate financing arrangement, a 2005 federal court ruling upheld
CMS's determination that the state's financing arrangement, in which the
providers did not retain Medicaid payments, was inconsistent with Medicaid
payment principles.
CMS's initiative has not been implemented in a transparent manner,
contributing to concerns about the consistency of its reviews of financing
arrangements across states. CMS's initiative has lacked transparency in
two ways. First, under the initiative, CMS did not issue written guidance
about the specific approval standards related to allowable financing
methods that it was applying in reviewing states' financing arrangements.
In January 2007, after receiving a draft of this report for review and
comment, CMS published a proposed regulation that could, when finalized,
provide guidance clarifying allowable arrangements for states to finance
the nonfederal share of their Medicaid payments. Second, CMS has not
always provided states that ended financing arrangements with clear,
written explanations for its determinations, which could inform the
directly affected states, as well as other states and interested parties,
about allowable financing arrangements. In only one-fourth of the
financing arrangements that states ended did CMS provide written
explanations to the affected states of the specific bases for determining
that their financing arrangements were inconsistent with one or more
Medicaid payment principles. Although CMS officials said that their
reviews of states' financing arrangements under the initiative have been
consistent, the lack of transparency has contributed to some states'
concerns about consistent treatment and precluded us from determining
whether CMS treated states that ended financing arrangements consistently.
To improve the transparency of CMS's oversight of states' Medicaid
financing arrangements, we are recommending that the Administrator of CMS
issue guidance to clarify allowable arrangements for financing the
nonfederal share of Medicaid payments. Such clarification could be
accomplished through one of the many different avenues CMS has for
providing states with guidance, including finalizing the regulation
proposed on January 18, 2007. We also recommend that the Administrator
provide to each state it reviews, and make available to all states and
other interested parties, written explanations of agency determinations on
the allowability of various arrangements for financing the nonfederal
share of Medicaid payments.
In commenting on a draft of this report, CMS indicated that the agency was
in the process of implementing our first recommendation and not in
agreement with the second.
o CMS stated that the proposed regulation published on January 18,
2007, would respond to our first recommendation that the agency
issue guidance to clarify allowable financing arrangements. We
agree, and updated our report to recognize the publication of the
proposed regulation after CMS had received a draft of our report
for review and comment. We note, however, that CMS's regulation is
not final, and we therefore maintain our recommendation.
o In disagreeing with our recommendation that it provide states
with written explanations of the agency's determinations under the
initiative, CMS raised concerns about providing details on the
allowability of arrangements that states have since corrected or
terminated and indicated that the proposed regulation would
satisfy the recommendation on a nationwide scale. Our
recommendation was not intended to be applied retroactively but,
rather, to be used in ongoing and future determinations. We have
clarified this intent in our report. Although we agree that the
proposed regulation, when finalized, could address some concerns
about the transparency of CMS's efforts, we continue to believe
that specific written explanations of the agency's future
determinations are also needed because they would further
delineate for states and others how CMS is applying its guidance
in reviewing specific arrangements. We therefore maintain our
recommendation.
CMS also commented that the report overemphasized the need for
transparency and overlooked the fairness of CMS's review
activities. We maintain that CMS's changed oversight approach,
states' concerns about the lack of guidance and consistent
treatment, and the significant potential fiscal effects of CMS's
determinations on states' budgets show the need for more
transparency in the agency's guidance and determinations.
Background
Title XIX of the Social Security Act establishes Medicaid as a
joint federal-state program to finance health care for certain
low-income, aged, or disabled individuals.^6 Medicaid is an
open-ended entitlement program, under which the federal government
is obligated to pay its share of expenditures for covered services
provided to eligible individuals under each state's federally
approved Medicaid plan. States operate their Medicaid programs by
paying qualified health care providers for a range of covered
services provided to eligible beneficiaries and then seeking
reimbursement for the federal share of those payments.^7 CMS
provides information to states about Medicaid program requirements
through federal regulations; a published State Medicaid Manual;
standard letters issued to all state Medicaid directors (known as
state Medicaid directors letters), which are also available on
CMS's Web site; and technical guidance manuals on particular
topics.
Within broad federal requirements, each state administers and
operates its Medicaid program in accordance with a state Medicaid
plan, which must be approved by CMS. A state Medicaid plan details
the populations a state's program serves, the services the program
covers (such as physicians' services and nursing home and
inpatient hospital care), and the rates of and methods for
calculating payments to providers. Any changes a state wishes to
make in its Medicaid program must be submitted to CMS for review
and approval in the form of a proposed state plan amendment. A
state plan amendment is valid indefinitely, barring any changes to
federal law or policy or the state's decision to further amend
that part of its state plan. Changes may range from editorial
changes, such as updates for agency name changes, to substantive
program changes, such as establishing new methods for developing
provider payment rates, adding certain types of payments, or
modifying eligibility for program services. State plan amendments
may be needed to reflect developments in federal law, regulation,
or case law or changes in state law, organization, policy, or
operation of the Medicaid program. States are not required to
submit state plan amendments on a regular basis but, rather, as
needed when the states seek to change some aspect of their
programs. Nor are states limited in the number of state plan
amendments they may submit. In fiscal year 2005, for example, 722
state plan amendments were submitted for CMS review, with the
number per state ranging from a low of 5 in three states to a high
of 41 in two states.
Under a statutory formula, the federal government may pay from 50
to 83 percent of a state's Medicaid expenditures.^8 Certain
inappropriate financing arrangements, however, have allowed some
states to effectively increase the federal share of their Medicaid
expenditures. Medicaid plans generally do not detail the specific
arrangements a state uses to finance the nonfederal share of
program spending. Title XIX of the Social Security Act allows
states to derive up to 60 percent of this nonfederal share from
local governments, as long as the state itself contributes at
least 40 percent.^9 In the past, we and others have reported that
some states were using inappropriate financing arrangements to
boost the federal share of program expenditures, most recently
through misuse of Medicaid upper payment limit (UPL) provisions.
UPLs are the federal government's way of placing ceilings on the
federal share of a state's Medicaid program; they are the upper
bound on the amounts the federal government will reimburse a state
for the federal share of state spending on certain services. Some
states have paid certain providers supplemental payments up to the
UPL, and the federal government has shared in those payments.^10
These supplemental payments were separate from and in addition to
those made at the states' standard Medicaid payment rates, and
some states required providers to return most or all of these
supplemental payments to the state, thus increasing federal
funding without a commensurate increase in nonfederal funding.
When government entities were involved, states were able to
increase federal funding inappropriately because supplemental
payments could be returned to the state through a mechanism known
as an intergovernmental transfer, or IGT. An IGT is a legitimate
feature in state finance that enables state and local governments
to carry out their shared governmental functions, for example,
through the transfer of revenues between governmental entities.
Some state supplemental payments involving IGTs, however, have
been part of inappropriate financing arrangements in which states
received federal Medicaid reimbursements based on payment amounts
that were greater than the amounts actually retained by the
providers for Medicaid purposes--effectively shifting Medicaid
program costs to the federal government. Figure 1 illustrates one
such example. In this case, the state made a $41 million
supplemental payment to a local-government hospital. Under its
Medicaid matching formula, the state paid $10.5 million and CMS
paid $30.5 million as the federal share of the supplemental
payment. After receiving the supplemental payment, however, the
hospital transferred back to the state approximately $39 million
of the $41 million payment, retaining $2 million. Essentially, the
state created the illusion of a $41 million supplemental hospital
payment when only $2 million was actually retained by the
provider. This illusory payment netted the state tens of millions
of dollars in excess federal funds.
Figure 1: Inappropriate State Financing Arrangement in Which
Provider Did Not Retain the Full Supplemental Payment
This type of financing arrangement is inappropriate for at least
two reasons. First, it enables states to obtain additional federal
reimbursements, effectively without contributing a nonfederal
share; in this case, the state actually netted $28.5 million as a
result of the arrangement. Second, it makes federal Medicaid
reimbursements available for other purposes. In some cases, states
have used the returned funds as the nonfederal share of additional
Medicaid payments to providers to seek still more federal
reimbursements, thus recycling federal funds to produce additional
federal funds.
CMS's initiative was undertaken as part of the agency's efforts to
strengthen financial oversight and ensure payment accuracy and the
fiscal integrity of the Medicaid program. Under this initiative,
whenever a state submitted to CMS for review and approval a
proposed state plan amendment revising a section of the state plan
related to payments to providers, CMS officials asked the state
five standard funding questions intended to gauge the
appropriateness of the state's financing arrangement.
Specifically, CMS asked states to describe
o whether Medicaid providers would retain all Medicaid payments
made to them, including the federal and nonfederal shares, or
whether any portion would be returned to the state,
local-government entity, or other organization;
o sources of state funds used to make the Medicaid payments, for
example, whether the nonfederal share came from appropriations
from the legislature or from IGT arrangements or other sources;
o the total amount of any supplemental payments made to each
Medicaid provider;
o the methods used by the state to estimate the UPL for different
types of providers; and
o whether total Medicaid payments to government providers exceeded
the providers' costs of providing services to Medicaid
beneficiaries.
Under the initiative, a state typically responds to CMS's
questions, which starts a series of communications between state
and CMS officials via e-mail, telephone, or formal letters and
culminates in a decision by CMS as to the appropriateness of the
state's financing arrangements related to the Medicaid payments.
If CMS determines that providers are not fully retaining payments
they received from the state, CMS withholds approval of state plan
amendments until the state provides assurances that it will end
inappropriate financing arrangements. After ending the
arrangement, the state may, with CMS approval, continue making the
related supplemental payments under a different financing
arrangement.
Twenty-nine States Ended Financing Arrangements, with Uncertain
Fiscal Effects
As a result of CMS's oversight initiative, 29 states ended
arrangements for financing Medicaid supplemental payments to
government providers, most often nursing homes and hospitals, from
August 2003 through August 2006. According to CMS, under each of
the ended arrangements, government providers retained less than
the full payment amounts. At the time of our review, 19 of the 29
states that ended financing arrangements were planning or
implementing alternative ways to finance the nonfederal share of
the supplemental payments, but they had not begun receiving
federal reimbursements under those alternatives. Hence, the fiscal
effects of the ended financing arrangements remained uncertain.
Ended Arrangements Involved Supplemental Payments Not Fully
Retained by Government Providers
From August 2003 through August 2006, 29 states ended one or more
financing arrangements, each of which involved supplemental
payments to health care providers--most often nursing homes and
hospitals--that were owned or operated by government entities,
such as states and counties. According to CMS, all of these
arrangements were inconsistent with Medicaid payment principles
because the related payments were not retained in full by these
government providers. CMS completed many reviews that did not
result in a state's ending a financing arrangement. Specifically,
according to CMS data, 19 of the 29 states that ended an
arrangement had other arrangements that had been reviewed with no
objections from CMS. In addition, 18 states other than the 29 that
ended arrangements underwent reviews of one or more financing
arrangements that met with CMS's approval and therefore did not
have to be ended.^11
In total, the 29 states ended 55 financing arrangements involving
supplemental payments made to government providers for various
Medicaid services identified in states' Medicaid plans. States
most frequently ended arrangements to finance supplemental
payments made to government-operated nursing homes (for example,
county nursing homes) and hospitals (such as county, municipal,
and state university hospitals). For example, one state
supplemented its standard Medicaid payments with quarterly
payments to county nursing homes. The state noted in a letter to
CMS that in state fiscal year 2003, two eligible county nursing
homes received supplemental payments totaling $18 million, of
which the nursing homes retained $509,000. Combined, arrangements
for financing nursing home payments and hospital payments for
inpatient services (42 percent and 24 percent, respectively)
represented about two-thirds of all 55 ended arrangements in the
29 states. The remaining one-third of ended financing arrangements
most often involved disproportionate share hospital, or DSH,
payments^12 (20 percent) and hospital payments for outpatient
hospital services (11 percent). See table 1 for a summary of the
financing arrangements ended by states from August 2003 through
August 2006.
^642 U.S.C. SS 1396 et seq. (2000).
^7Throughout this report, we refer to funds used by state Medicaid
programs to pay providers for rendering Medicaid services as "payments."
We refer to federal funds received by states from CMS for the federal
share of states' Medicaid payments as "reimbursements."
^8Under Medicaid law, states with lower per capita incomes receive higher
federal matching rates. 42 U.S.C S 1396d(b) (2000).
^942 U.S.C S 1396a(a)(2) (2000).
^10UPLs are based on the amounts that Medicare, the federal health care
program that covers seniors aged 65 and older and some disabled persons,
pays for comparable services. Because states' standard Medicaid payment
rates are often lower than Medicare rates for the same services, some
states calculated the difference between what they actually paid providers
using standard Medicaid rates and the UPL, and then made a supplemental
payment for the difference to a few government providers.
^11On the basis of information from CMS and our contacts with the states,
we determined that the three remaining states and the District of Columbia
had not ended a financing arrangement as a result of CMS's initiative.
^12DSH payments are separate Medicaid payments states make to hospitals.
Under Medicaid law, states are required to make special hospital payments
to supplement standard Medicaid payment rates and help offset costs for
hospitals that serve a disproportionate share of low-income or uninsured
patients; these payments came to be known as disproportionate share
hospital, or DSH, payments. States have some discretion in designating
which hospitals, including hospitals owned or operated by local
governments, qualify for DSH payments. In response to inappropriate state
financing arrangements involving DSH payments in the early 1990s, Congress
passed provisions capping the amount of DSH payments a hospital may
receive and limiting the total amount of DSH payments a state may make to
all hospitals. 42 U.S.C. S 1396r-4(f)-(g) (2000).
Table 1: Financing Arrangements Ended, by State and Type of Supplemental
Provider Payment Involved, from August 2003 through August 2006
Type of supplemental payment involved in ended arrangement
Nursing Inpatient Disproportionate Outpatient Home
State home hospital share hospital hospital health Physician
Alabama
Alaska
Arkansas
California
Georgia
Iowa
Kansas
Kentucky
Louisiana
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
New Hampshire
New Jersey
New York
North
Carolina
Oklahoma
Oregon
Pennsylvania
South
Carolina
South Dakota
Tennessee
Virginia
Washington
Wisconsin
Total (29) 23 13 11 6 1 1
Source: CMS and states.
Note: Data from GAO analysis of CMS documents and state responses to GAO's
questionnaire.
Although the specific details of the ended financing arrangements differed
from state to state, in more than half of all cases (31 of 55), we
identified documents in CMS's files confirming that under the
arrangements, providers retained less than the full amount of the
supplemental payments they received. For example:
o One state explained in its responses to CMS's standard funding
questions that a portion of the supplemental payments to
non-state-government-owned hospitals for inpatient services was
returned to the state. Payments were made to the hospitals, which
retained an amount equal to 3 percent of the payments plus 50
percent of the federal share of the payment. The remaining funds
were transferred by the hospitals to their county governments. The
counties transferred these funds back to the state via an IGT. The
transferred funds were allocated to the state's Medicaid program
to fund additional Medicaid services.
o An official from another state noted in an e-mail to CMS that
facilities participating in the state's UPL program transferred an
amount that exceeded the nonfederal share of certain payments. For
example, as explained in a response from a CMS official to the
state, under the state's arrangement for supplemental nursing home
payments, providers were required to transfer to the state the
nonfederal share of the supplemental payments plus approximately
an additional 43 percent, which the state used to fund other
Medicaid expenditures. CMS concluded that under such an
arrangement, the nursing homes netted only 57 percent of the total
supplemental payment reported by the state.
In the remaining cases, we could not conclusively determine from
reviewing CMS's documentation whether the involved providers
retained less than the full amount of the supplemental payment.
CMS reported to us, however, that in all of the arrangements
states ended, providers retained less than the full amount of the
supplemental payments they received because the states required
providers to either (1) return a portion of the payment to the
state through an IGT or (2) transfer to the state more than the
nonfederal share of the payment before the state made the payment
to providers and sought federal reimbursement.
In about two-thirds of cases, states ended financing arrangements
by removing or revising the pertinent supplemental payment
provisions in their state plans. Specifically, states added
provisions to their state plan amendments that would, as of a
given date (most often, it was the end of the states' fiscal year
2005), end the type of supplemental payments under CMS review. As
CMS explained to one state, providing such an end date in writing
assured CMS that the state would not continue the payments in
question (in this case, supplemental payments to local-government
hospitals) under the inappropriate financing arrangement;
moreover, if the state did not agree to end the arrangement, CMS
would not approve the state's proposed state plan amendment. In
response, the state resubmitted its amendment, adding a provision
ending its supplemental payments to local-government hospitals as
of June 30, 2005, and in its cover letter to CMS noted that the
state would resume making such payments only under an arrangement
acceptable to CMS. In another case, CMS required a state to end
its arrangements for certain supplemental payments as a condition
for approving the state's section 1115 waiver proposal.^13 Under
the waiver agreement, CMS required the state to end, by amending
its state plan, the supplemental inpatient hospital payments,
nursing home payments, and DSH payments for which providers did
not retain the full amounts. This process--in which CMS required
states to remove from their state plans provisions governing
certain supplemental payments, thereby ending the inappropriate
financing arrangements--was the typical approach that CMS took
with states under the initiative. In some cases (5 of 55),
however, CMS accepted from states written assurance that the state
would end an inappropriate financing arrangement. For example, one
state wrote to CMS that it would in the future revise its
arrangement to comply with CMS's current policy.
Fiscal Effects Are Uncertain Because Most States Were Seeking
Continued Federal Reimbursements under Alternative Arrangements
The state and federal fiscal effects of states' ending their
financing arrangements were unclear because most of the states (19
of 29 states) were planning or implementing alternative
arrangements to continue obtaining federal reimbursements for the
related supplemental payments. As of October 2006, only 12 of the
19 states that were planning or implementing different financing
arrangements had resumed seeking federal matching funds. Until
states begin to obtain federal matching funds under the
alternative arrangements, the fiscal effects of the initiative
will remain unclear.
The 29 states we contacted provided us estimates of potential
annual reductions in federal reimbursement related to ended
arrangements--most frequently based on the amount of federal
reimbursement under the ended arrangements in their fiscal year
2005--that totaled nearly $1.9 billion and ranged from $0 to
approximately $382 million among the states. Of the 29 states, 14
states chose not to continue making the supplemental payments
related to one or more ended arrangements.^14 For example, one
state discontinued its supplemental payments to public nursing
homes at the end of its fiscal year 2005 and, as a result, would
no longer receive federal reimbursement for such
payments--reimbursement totaling nearly $5 million in state fiscal
year 2004. The 14 states that were not taking steps to continue
obtaining comparable federal reimbursement estimated that they
would each annually receive from $0 to $69 million less in federal
matching funds.^15
Most states' estimates were preliminary as of October 2006,
because 19 states were planning or implementing different
arrangements for financing the related supplemental payments from
those that CMS had required them to end. Doing so would allow the
states to continue to seek federal reimbursement for those
payments. To obtain such federal reimbursement, however, states
were subject to CMS review of their alternative arrangements for
financing the nonfederal share of their payments. Several states
were continuing to use an IGT to fund the nonfederal share, but
with changes that they expected to meet with CMS approval;
specifically, under a revised IGT, providers would retain in full
the supplemental payments made to them. Other states were planning
or implementing other arrangements, such as increasing
appropriations or generating new revenues by imposing taxes on
certain providers, to continue making supplemental payments. The
alternative chosen by the largest number of states--10 of the 19
states adopting alternative arrangements--was an approach based on
government providers' certifying their Medicaid expenditures to
the state. Such certified public expenditures, or CPEs, do not
involve an actual transfer of funds by government providers to the
state.^16 Table 2 describes these alternatives and the number of
states planning or implementing each one.
^13Section 1115 of the Social Security Act allows the Secretary of Health
and Human Services, in connection with experimental, pilot, or
demonstration projects likely to promote program objectives, to waive
certain statutory Medicaid requirements and provide federal matching funds
for expenditures for which federal matching funds would not otherwise be
available. 42 U.S.C. S 1315 (2000).
^14Four states that ended more than one financing arrangement chose to
discontinue supplemental payments related to one of the ended
arrangements. However, these states were also planning to use an
alternative financing arrangement to continue making payments related to
another of the ended arrangements. As a result, we counted the four states
in the total number of states discontinuing payments related to an ended
financing arrangement and in the total number of states continuing
payments under an alternative arrangement.
^15The state that estimated a potential reduction of $69 million in
federal matching funds also reported that approximately $58 million would
be offset by new federal funding made available under a section 1115
demonstration project that included federal funding for health care
expenditures previously paid with state and local funds.
Table 2: Number of States Planning or Implementing Certain Alternative
Arrangements for Financing the Nonfederal Share of Payments, as of October
2006
Number
Alternative of
arrangement states Description Example
Medicaid certified 10 Government provider, Under one state
public expenditure such as a county proposal, 22 government
(CPE) hospital, certifies to hospitals would be paid
a state the amount of in advance for the full
expenditures for a cost of providing
Medicaid-covered services to indigent
service provided to a individuals, including
Medicaid beneficiary. Medicaid beneficiaries.
The state obtains The hospitals would
federal Medicaid certify the total
matching funds based amount of Medicaid
on the amount of the expenditures to the
expenditure. state, and the state
would then seek federal
reimbursement on the
basis of the certified
amount.^a
Revised 8 Continued use of IGTs During state fiscal
intergovernmental with revisions agreed year 2006, one state
transfer (IGT) to by CMS. will continue using
Specifically, CMS is IGTs for inpatient
requiring that (1) hospital services.
IGTs from providers to Transfers will be
a state occur before limited to the
supplemental payments nonfederal share of the
are made and (2) the Medicaid supplemental
amount of an IGT not payment. The state will
exceed the nonfederal obtain assurances from
share of the Medicaid entities making IGTs
costs. This approach that all payments will
provides some remain with the
assurance that hospitals.
government providers
are contributing only
toward the nonfederal
share of a state's
Medicaid costs, as
prescribed by federal
statute.
Provider tax 4 A tax, fee, One state legislature
assessment, or other passed an act
mandatory payment, authorizing the state
imposed on health care to implement a provider
services or providers. tax on public,
States may use non-state-government
resulting revenue to hospitals to fund the
pay their nonfederal nonfederal share of
share of Medicaid Medicaid payments for
costs under inpatient and
statutorily specified outpatient services,
circumstances.^b effective July 2007.
State appropriation 3 State revenue set One state partially
aside to pay for the replaced the portion of
nonfederal share of the nonfederal share
Medicaid spending. previously funded by an
IGT with state
appropriations.
Source: CMS and states.
^16Under a CPE arrangement, government providers certify their Medicaid
expenditures to the state, and the state then obtains federal
reimbursement on the basis of the certified expenditures. Medicaid law
allows states to finance the nonfederal share of payments with CPEs as
long as the funds are (1) derived from state or local tax revenue and (2)
certified by units of local or state government as eligible for federal
reimbursement. 42 U.S.C. S 1396b(w)(6) (2000). States are responsible for
ensuring that expenditures are eligible for federal reimbursement by
reviewing standard cost reports filed annually by each government
provider.
Notes: Data from GAO analysis of CMS and state documents, state responses
to GAO questionnaire, and information reported by state officials. Numbers
do not sum to 19--the number of states reporting that they were planning
or implementing alternative arrangements for financing the nonfederal
share--because some states were using a combination of alternatives.
aThis state received CMS approval to use CPEs to finance the nonfederal
share of supplemental inpatient and DSH payments and to restructure
Medicaid payments for all inpatient hospital services under a waiver of
Medicaid requirements granted under section 1115 of the Social Security
Act, 42 U.S.C. S 1315 (2000).
b42 U.S.C. S 1396b(w)(6) (2000). States may receive federal matching funds
for provider taxes only if such taxes are broad-based (i.e., imposed on
all items or services in the class of services or providers thereof);
uniformly imposed (i.e., all items or services in the class or providers
thereof pay the same rate of tax); and do not result in any taxpayers
being held harmless (i.e., receiving state funds to reduce the net payment
to the state to below the amount of the tax). 42 U.S.C. S 1396b(w)(3)
(2000). When the tax rate is higher than 6 percent, CMS will consider the
hold-harmless requirement violated if 75 percent or more of the taxpayers
receive 75 percent or more of the taxes paid back from the state in
enhanced Medicaid or other state payments. 42 C.F.R. S 433.68(f)(3)
(2006).
States had differing views about the potential fiscal effects of adopting
alternative arrangements for financing the nonfederal share of
supplemental payments. Half of the states using CPEs (5 of 10) expected
CPEs to result in federal reimbursement comparable to what they had
received under their ended financing arrangements. For example, officials
from one state explained that under its previous arrangement, DSH payments
had been limited to costs, and under the state's CPE arrangement (approved
by CMS in December 2005), the state would continue obtaining the same
amount of federal reimbursement. In contrast, officials from the remaining
5 states using CPEs expressed concern that CPEs could yield less in
federal funds than the arrangements they replaced, in part because CPEs
must be based on the documented facility-specific costs of providing
Medicaid services to Medicaid beneficiaries. An official from 1 of the 5
states explained that, under a prior financing arrangement, the state
sought federal reimbursement on amounts up to the UPL, regardless of the
facilities' actual costs for providing services. In using CPEs, however,
the state will seek federal reimbursement for the lower of either a
facility's UPL or its actual Medicaid expenditures, and some facilities'
expenditures were less than the UPL.
The fiscal effects of states' replacing their ended financing arrangements
with alternative arrangements, such as CPEs, were uncertain as of October
2006 because several states had not fully implemented the alternatives and
others faced further CMS review before receiving federal matching funds.
Specifically, 1 of the 19 states was still planning its approaches; 6
states reported having implemented alternative arrangements but had not
begun seeking federal reimbursements; and the remaining states (12 of 19
states) had made payments under their alternative arrangements and had
begun seeking federal reimbursements. Those 12 states, however, faced
further CMS review before receiving reimbursements. CMS officials informed
us that CMS had efforts under way to monitor states' use of alternative
arrangements as the states resumed seeking federal reimbursement. CMS's
efforts may affect the amount of federal reimbursements the states
receive. For example, CMS deferred paying close to $2 million in federal
matching funds to a state that resumed seeking reimbursement for
supplemental hospital payments under a revised IGT arrangement. As of
October 2006, the state and CMS were still working to resolve CMS's
concerns with the state's alternative arrangement. CMS also plans to
review other types of alternative arrangements. For example, in its
approvals granted from December 2005 through April 2006 of 3 states' plans
to use CPEs, CMS informed the states that it planned to conduct financial
reviews to ensure that the states' reported expenditures were accurate and
that all supplemental payments to certifying facilities had appropriate
nonfederal funding.^17
CMS's Initiative Departs from Past Approach and Is Consistent with Medicaid
Payment Principles
CMS's initiative is a departure from the agency's past oversight approach
and is consistent with Medicaid payment principles. In the past, CMS's
approach to inappropriate state financing arrangements did not involve any
assessment of whether individual providers were retaining the supplemental
payments they received from states. As a result, before the initiative,
CMS authorized some states to make supplemental payments even when the
agency was aware that providers were not retaining the full payment
amount. States that ended financing arrangements view CMS's initiative as
a change in policy. One state, Minnesota, challenged CMS's disapproval of
its state plan amendment in July 2004. Minnesota argued, in part, that CMS
had departed from its past interpretation of Medicaid requirements and
should have gone through the process of proposing and receiving comments
on a regulation (known as "notice-and-comment rule making") before
disapproving the amendment.^18 In July 2006, this argument was rejected,
and the disapproval was upheld by the CMS Administrator.^19 The state
filed an appeal in federal court in September 2006, and as of February
2007, this appeal was pending. In another case, unrelated to CMS's
initiative, in which a state challenged CMS's disapproval of a state plan
amendment involving an inappropriate financing arrangement, a 2005 federal
court ruling upheld CMS's determination that the state's financing
arrangement, in which the providers did not retain Medicaid payments, was
inconsistent with Medicaid payment principles.^20
17In addition to these efforts, CMS identified CPEs as an issue for
focused financial reviews in the last 3 fiscal years, 2004 through 2006.
See GAO, Medicaid Financial Management: Steps Taken to Improve Federal
Oversight, but Other Actions Needed to Sustain Efforts, [27]GAO-06-705
(Washington, D.C.: June 22, 2006).
^18Notice-and-comment rule making (also referred to as informal rule
making) is a process in which an agency publishes a proposed rule in the
Federal Register for public comment. After considering the comments
received, the agency issues a final rule.
CMS's Initiative Departs from Past Oversight Approach
CMS's requirement that states end financing arrangements in which
providers do not retain the full payment represents a departure from the
agency's past oversight approach to ensuring that states adhere to
Medicaid payment principles. Before 2003, CMS's most recent approach for
addressing inappropriate state financing arrangements curtailed such
arrangements by restricting states' ability to combine, or "aggregate,"
the amount of payments they could make under the UPL to different types of
providers. CMS placed this restriction by revising Medicaid's UPL
regulation in 2001.^21 The revision took place after some states were
found taking advantage of the UPL by making supplemental payments to
government facilities at rates much higher than established Medicaid rates
and then requiring the facilities to return most or all of the
supplemental payments to the state.^22 CMS determined that these financing
arrangements were not consistent with Medicaid's principle of efficiency
and economy and restricted states' ability to aggregate payments across
different types of providers. The revised regulation did not address the
use of IGTs--the transfer of funds between states and local-government
providers--or whether providers were retaining the Medicaid payments made
under the new limits. At the time it issued the regulation, CMS determined
that the best option for reducing excessive federal reimbursements was to
revise the UPL regulation to limit the extent to which aggregated
supplemental payments could be made. CMS recognized the possibility that
excessive federal funds could still be obtained under the new regulation.
In the preamble to its 2001 regulation, CMS reported that it was concerned
about how some states used fund transfers between states and local
governments and noted that, if problems continued in the future, further
actions could be needed to ensure that federal funds were used to match
bona fide expenditures.
^19In re The Disapproval of the Minnesota State Plan Amendment 03-006, No.
2004-04 at 15, note 36 (CMS Administrator, July 12, 2006).
^20Alaska Dep't of Health & Soc. Servs. v. Ctr. for Medicare & Medicaid
Servs., 424 F.3d 931, 939-40 (9th Cir. 2005).
^21Before the 2001 regulation, separate UPLs existed for different classes
of Medicaid services, such as inpatient hospital services, outpatient
hospital services, and nursing facility services. 42 C.F.R. S 447.272
(2000). Within the different provider types--state-government-operated
facilities, local-government-operated facilities, and private
facilities--only state-operated facilities had separate UPLs for each
class of service, with the exception of outpatient hospital services,
which did not have a separate UPL for state-government facilities. As a
result, within each service class, some states sought federal
reimbursement for large supplemental payments by combining--or
aggregating--the payment amount allowed under their UPLs for the entire
group of local-government and private facilities, even if the actual
payment was made to only a handful of selected government facilities. In
December 2000, Congress directed the Health Care Financing Administration
(HCFA, the former name for CMS) to issue a final regulation to revise the
UPL regulation and limit states' ability to obtain excessive federal
reimbursements. Medicare, Medicaid, and SCHIP Benefits Improvement and
Protection Act of 2000, Pub. L. No. 106-554, app. F, S 705(a), 114 Stat.
2763, 2763A-575-2763A-576. In January 2001, HCFA issued the final UPL
regulation, which established separate UPLs for private facilities and for
local-government facilities for different classes of services, including
inpatient hospital services, outpatient hospital and clinic services, and
nursing facility services. 66 Fed. Reg. 3,148 (Jan. 12, 2001). The final
rule also contained provisions that set the UPL for hospitals operated by
local governments at 150 percent of what Medicare would pay, rather than
100 percent, which allowed states to make larger supplemental payments to
such hospitals. In January 2002, CMS issued another final UPL regulation
that replaced the 150 percent UPL for local-government hospitals with a
100 percent UPL. 67 Fed. Reg. 2,602 (Jan. 28, 2002).
^22For additional information, see GAO, Medicaid: Improved Federal
Oversight of State Financing Schemes Is Needed, [28]GAO-04-228
(Washington, D.C.: Feb. 13, 2004).
In the months after CMS issued its 2001 regulation and before its
initiative, CMS approved some states' financing arrangements that entailed
the transfer of Medicaid supplemental payments from government providers
back to the state. CMS's efforts after issuing the 2001 UPL regulation
focused on ensuring that states were not seeking excessive federal
reimbursements based on aggregated local-government and private-facility
UPLs, as states had done before the regulation. Otherwise, CMS did not
curtail financing arrangements, even when they involved providers' not
retaining all of the payments made to them.^23 After the 2001 UPL
regulation went into effect and before the initiative began, CMS approved
states' Medicaid plan amendments establishing supplemental payments to
government providers even when the agency was aware that providers were
not retaining the supplemental payments. Subsequently, however, CMS
determined that these approved arrangements were inappropriate because the
providers were not retaining the payments. For example:
o On March 13, 2002, CMS approved one state's proposal to
establish a supplemental payment for inpatient hospital services
provided by local-government hospitals. During CMS's review of
this proposal, the state informed CMS via letter that it was
likely that the majority of the payments would be returned by the
providers to the state. In state fiscal year 2002, the state's
estimated supplemental payments to local-government providers
totaled about $22 million. On October 23, 2003, however, after
submitting a state plan amendment to adjust its standard Medicaid
payment rates for hospitals, the state received CMS's standard
funding questions under the initiative. CMS's subsequent review
resulted in the state's ending the previously approved
supplemental payment involving local-government hospitals.
o On May 19, 2003, CMS approved another state's supplemental
payment for inpatient hospital services provided in government
hospitals. During the agency's review of the state plan amendment
for these payments, the state informed CMS in writing that this
proposal would use state plan language similar to the state's
supplemental county nursing home payment. CMS had approved this
nursing home payment in 2001, even though the agency had been
informed when the payment was proposed that the underlying
financing arrangement involved bank loans and wire transfers among
counties. Less than 2 months before the state submitted its state
plan amendment for the supplemental payment to government
hospitals, CMS was informed that the county nursing homes would
retain little of the supplemental payments made to them.^24
Nevertheless, CMS approved the similar request involving
supplemental payments for inpatient hospital services in
local-government hospitals. On August 21, 2003, the state received
CMS's standard questions under the initiative after it had
submitted a nonsupplemental inpatient hospital state plan
amendment to CMS for review. CMS's subsequent review led to the
state's ending its supplemental payments to the local-government
hospitals.
States Report That CMS Has Changed Certain of Its Policies on
State Financing Arrangements
Twenty-four of the 29 states that ended financing arrangements and
that we contacted reported that under its initiative, CMS has
changed its policies on what is an appropriate state financing
arrangement. Four states reported that they had no basis to judge
whether CMS has changed its policy, 1 state responded that CMS's
actions do not represent a change in policy, and 1 state did not
respond to this question.^25 Officials of 6 states expressed
concerns that before objecting to state plan provisions comparable
to what it had approved in the past, CMS should have used a
rule-making process to enable states to comment on any proposed
changes.^26 According to CMS, however, the agency did not adopt a
new policy but is scrutinizing states' payments and their
underlying financing arrangements more closely to ensure that they
comport with existing laws and regulations and that federal
reimbursement is justified.
One state, Minnesota, challenged CMS's disapproval under the
initiative of a state plan amendment^27 by formally requesting
that the CMS Administrator reconsider the disapproval.^28 In its
July 2004 reconsideration request, the state argued, among other
points, that the disapproval of its state plan amendment to
increase supplemental payments to county-operated nursing homes
was based on a new policy that constituted a major departure from
past CMS policy.^29 The state noted that CMS reviewed and approved
the county nursing home payment on two previous occasions without
asking any questions about whether the nursing homes retained the
funds they were paid.^30 According to the state, CMS changed its
policy without going through notice-and-comment rule making, and
thus the agency's post-August 2003 policy could not be used to
disapprove the state's plan amendment. The Administrator upheld
CMS's disapproval on July 12, 2006, finding the state's argument
that CMS was required to use notice-and-comment rule making
unsupported. The Administrator's decision stated that CMS is
required to administer the Medicaid program in a manner consistent
with statute, and applying the law correctly does not require
notice-and-comment rule making. In September 2006, the state
appealed the decision to a federal circuit court; the appeal was
pending as of February 2007.
A Federal Court Found a Similar Action to Be Within CMS�s
Authority and Consistent with Medicaid Payment Principles
A 2005 court case found that CMS acted appropriately in
disapproving one state's proposed plan amendment in which
providers would retain only 10 percent of the payments they
received. While this disapproval did not result from CMS's
initiative, the basis for CMS's actions in the case shared key
characteristics with CMS's basis for ending states' financing
arrangements under its initiative.^31 In a September 12, 2005,
ruling, the United States Court of Appeals for the Ninth Circuit
upheld CMS's disapproval of a state plan amendment that was
estimated to increase federal reimbursements by $50 million a year
even though providers would retain only $5 million of the payments
that had been made to them.^32 CMS disapproved the state's
proposal, finding that it would result in payments that were not
consistent with Medicaid's principle of efficiency, economy, and
quality of care because the providers would return the bulk of the
payment to the state. The court found that CMS had an obligation
to ensure that the Medicaid statute was satisfied before approving
a state plan amendment and that CMS correctly applied the Medicaid
statute in disapproving the plan amendment. Specifically, the
court upheld CMS's determination that the state's proposed payment
was not consistent with the principle that provider payments be
efficient and economical.
CMS�s Initiative Lacks Transparency, Raising Concerns about
Consistent Review of State Financing Arrangements
As implemented, CMS's oversight initiative has lacked transparency
and raised concerns about consistency in CMS's reviews of states
that ended financing arrangements. The initiative has not been
transparent in that CMS did not issue written guidance about its
specific approval standards related to allowable financing methods
under the initiative--that is, the conditions upon which the
agency would or would not approve a state's financing arrangement.
CMS published a proposed regulation in the Federal Register on
January 18, 2007, that could, when finalized, provide guidance
clarifying allowable arrangements for financing the nonfederal
share of Medicaid payments. In addition, CMS has not always
clearly communicated in writing its review determinations to
individual states that ended financing arrangements or provided to
all states a record of its determinations under the initiative.
Although CMS officials said that their reviews have been
consistent because the same funding questions have been asked
consistently of all states, the lack of transparency has prompted
states to raise questions about the consistency of CMS's reviews
and precluded us from determining whether CMS treated states that
ended financing arrangements consistently.
CMS�s Initiative Lacks Transparency, Raising Concerns about
Consistent Review of State Financing Arrangements
CMS's initiative has lacked transparency in two ways. First, the
agency did not issue written guidance explaining the specific
standards it used for reviewing and approving states' financing
arrangements. Consequently, officials in several of the 29 states
that ended financing arrangements told us that it was unclear
exactly what financing arrangements CMS would and would not allow
and why arrangements approved in the past were no longer allowed.
Second, CMS did not always explain in writing to the states that
ended financing arrangements the specific bases for its
determinations, nor did it make available for the benefit of other
states and interested parties any record of its determinations
that certain arrangements were unallowable.
CMS Did Not Provide Guidance about Its Specific Approval Standards
under the Initiative
CMS did not, before or under the initiative, provide guidance to
the states about its specific approval standards, something it had
done for some previous oversight actions. For example, before the
agency took actions in 2001 and 2002 to further limit states'
UPL-related financing arrangements, CMS issued a letter to state
Medicaid directors. In each case, the letters communicated the
problems the agency had identified with existing UPL regulations
and associated financing arrangements, the problems' effect on the
Medicaid program and why action was needed, and the type of action
the agency proposed to take. In contrast, for the 2003 oversight
initiative, CMS did not issue a state Medicaid directors letter or
other written guidance that would explain the nature of the
agency's intent to address the problem or its specific standards
for allowable financing methods, such as allowable use of IGTs.
Rather, CMS began asking states submitting state plan amendments
for review to answer the five standard questions about how they
financed the nonfederal share of their payments.
The lack of CMS guidance to explain the specific standards used
under the initiative has resulted in confusion among states about
allowable financing arrangements. When states did receive
guidance, it was more likely to be oral than written. Only 8 of
the 29 states (28 percent) we contacted that had ended financing
arrangements reported they had received written guidance or
clarification from CMS, before or during the review process,
regarding appropriate and inappropriate financing arrangements.
States told us it was not always clear what financing arrangements
CMS would allow and why arrangements approved in the past would no
longer be approved. Officials in several states that ended
financing arrangements told us that CMS did not provide the
guidance they needed about such topics, including appropriate and
inappropriate use of IGTs and CPEs. For example, officials from
one state commented that they did not understand why CMS would no
longer approve the financing arrangement involving transfer
payments with local-government providers that the state had used
for more than a decade. Officials from another state remarked that
the distinction between IGTs and CPEs, and the reasons CMS
appeared to approve of CPEs over IGTs, were not always clear.
According to CMS officials, the agency has provided guidance on
CPEs by working with states individually as the states have
developed their proposed financing arrangements.
During our review, a senior CMS official informed us that the
agency was considering providing guidance to all states on proper
methods for financing the nonfederal share of Medicaid payments,
including clarification on issues such as IGTs and CPEs. On
January 18, 2007, after it received a draft of this report for
review and comment, CMS published a notice of proposed rule making
to expressly limit Medicaid payments to government providers to
the providers' actual Medicaid costs.^33 The proposed regulation
also includes additional guidance related to state financing
arrangements and, when finalized, could provide states with needed
clarifications.
CMS Did Not Always Document Its Determinations or Make Them
Available to States
CMS did not communicate with states in clear, specific terms in
writing that the states' financing arrangements were inconsistent
with Medicaid payment principles or why they were inconsistent and
should be ended. We reviewed case files obtained from CMS to
assess how the agency communicated its determinations to the 29
states that ended 55 arrangements under the initiative. In more
than half the cases (30 of 55 arrangements, or 52 percent), we
found no documentation that CMS communicated to the states in
writing the reasons that a state's arrangement was inconsistent,
and in another 10 cases (17 percent), we found only general
explanations of CMS's concerns with the financing arrangement in
question.^34
In only one-fourth of the cases did CMS communicate in writing to
a state the specific basis for its concerns with that state's
financing arrangement. Specifically, for 14 of the 55 arrangements
(25 percent) the states ended, CMS informed the state in writing
that its arrangement was inconsistent with particular Medicaid
payment principles and explained why it was inconsistent. The
following example illustrates one of the cases where CMS
communicated its determinations in writing to the state, including
the basis for its determination:
o First, CMS clearly identified in writing the statutory
provisions with which it found the state's financing arrangement
to be inconsistent: "the State is claiming Federal matching funds
for payments to non-state public hospitals for which a significant
portion of the payments are returned to the State. CMS considers
this funding arrangement to be inconsistent with Sections
1902(a)(2), 1902(a)(30), and 1903(a) of the Social Security Act."
o Second, CMS discussed each statutory provision cited above to
explain why the state's financing arrangement was not consistent
with a given principle. For example, CMS wrote about section
1902(a)(30)(A): "The supplemental payments are not consistent with
the requirement under section 1902(a)(30)(A) of the Act that
payment rates must be consistent with `efficiency, economy and
quality of care.' In light of the State's admission that the
facilities are refunding a significant portion of the supplemental
payments, the proposed payment rate is not consistent with either
efficiency or economy. The refund requirement indicates that the
State itself has determined that the full payment amount is not
required by the facilities to ensure Medicaid beneficiaries'
access to services. Moreover, the proposed payment rate is not
consistent with either economy or quality of care because it
exceeds the funding actually made available to support the
provision of services to Medicaid beneficiaries."
In most cases, CMS did not provide states with similar written
explanations of the basis for its determinations. For 30 of the 55
financing arrangements that we reviewed and that CMS determined
were unallowable under the initiative, we found no evidence that
CMS communicated in writing to the states, even in general terms,
that the states' arrangements were inconsistent with Medicaid
payment principles or why. For 10 arrangements, either CMS
provided a general written explanation that the state's
arrangement was inconsistent with a payment principle and why, or
CMS's written communications were incomplete or difficult to
interpret. For example, CMS wrote in a letter to one state that
its financing arrangement for nursing home payments appeared to be
inconsistent with portions of the Social Security Act, but the
agency did not further explain why.
CMS has not made its determinations about any particular state's
financing arrangement known or available to other states, as has
been done in other contexts. The Department of Health and Human
Services' Food and Drug Administration, for example, maintains on
its Web site various directories of guidance documents it has
issued, including an annual comprehensive list with links to the
documents themselves, and a searchable docket management system
that provides access to the agency's official repository for
administrative proceedings and other materials. In another
example, the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003^35 requires the Department of Health and
Human Services to make publicly available the factors it considers
in making national Medicare coverage determinations--that is,
whether an item or service is reasonable and necessary and thus
eligible for Medicare coverage. These determinations are posted on
CMS's Web site, where they are available for public comment. CMS
has noted that such coverage guidance documents represent the
agency's current thinking on a particular topic but do not create
or confer any rights for any individual and do not bind CMS or the
public. In contrast, under CMS's initiative--involving substantial
state and federal Medicaid dollars--CMS does not have any similar
procedure in place for publicizing its case-by-case determinations
on financing arrangements.
Lack of Transparency Has Raised Concerns among States about
Consistent Review of State Financing Arrangements
The lack of information to states on the basis for CMS's
determinations under the initiative has raised concerns among the
states we contacted about whether CMS has treated them
consistently; from CMS's point of view, however, the agency has
taken several steps to ensure consistent application of the review
process. The lack of written guidance appears to have resulted in
differences in states' understanding of what CMS would approve.
For example, several states understood that they were required to
end the use of IGTs, while other states understood that they would
be able to continue using IGTs with revisions that met with CMS
approval. Determining whether such differences of understanding
resulted from inconsistent treatment by CMS is difficult without a
complete and clear written record of CMS's discussions with states
about appropriate and inappropriate financing arrangements. Some
of the states that responded to our questionnaire, or that we
interviewed, expressed concerns about perceived differences in how
CMS had reviewed state financing arrangements and allowed states
to deal with arrangements that the agency found to be inconsistent
with Medicaid payment principles. Officials of one state observed,
"Because the decisions and reasoning are not written and issued to
all states, we have no way of ensuring that CMS decisions are made
consistently across all states."
Six of the 29 states that ended financing arrangements and
responded to our questionnaire expressed the opinion that CMS's
case-by-case review process was not implemented consistently
across states; another 17 states responded that they had no basis
for judging whether CMS treated states consistently; and only 3
states responded that CMS had been consistent.^36 Officials of one
state added that while CMS had attempted to apply a consistent
review technique by asking the same standard funding questions
about each plan amendment that each state submitted, the results
of the reviews seemed to vary across states: some states were
required to return funds, while others were required to end their
financing arrangements. The Medicaid director of another state
remarked that asking the standard funding questions every time a
state submits a plan amendment was a waste of time and
duplicative, and, moreover, the CMS review process had not been
applied consistently because states had been able to negotiate
different deals with CMS to replace their IGTs with other
financing arrangements.
A September 2006 report prepared for the Department of Health and
Human Services' Office of Inspector General, which reviewed CMS's
financial management oversight of the Medicaid program, raised
concerns about the need for transparency and clear guidelines in
CMS's process for reviewing and approving state plan amendments.
The report recommended, among other things, that CMS "to the
extent possible, provide visibility into the program
administration activities, including judgments regarding
individual state operations, which can help ensure that decisions
are made transparently and consistently across jurisdictions
recognizing the unique nature of each local Medicaid program.
Because routine judgments or interpretations may have long-term
funding consequences, a process to assess which decisions merit
further visibility should be developed and implemented."^37
CMS officials told us that the agency had several controls in
place to ensure that its review of state financing arrangements
was implemented consistently. Officials told us that they followed
CMS's established state plan amendment review procedures and asked
the same standard funding questions about each plan amendment
submitted by each state. In addition, in early 2005, after the
initiative was under way, CMS created a unit to centralize
responsibility for reviewing and approving state plan amendments
related to reimbursement. This central office unit, the Division
of Reimbursement and State Financing, also directs about 90
funding specialists hired from late 2004 through April 2006 to
help CMS (1) gain a better understanding of how states budget for
and finance their portion of Medicaid expenditures and (2)
actively identify state financing arrangements that could result
in inappropriate claims for federal reimbursement or increased
federal costs. A major activity of the funding specialists during
their first year was to complete state Medicaid program profiles,
which describe the sources of each state's nonfederal share of
Medicaid funds, state payment methodologies, and financing-related
concerns that may need to be addressed. CMS officials told us that
routine review of states' quarterly Medicaid expenditure reports
and focused financial management reviews help ensure that
high-risk financing arrangements that have not been reviewed under
the initiative's state plan amendment process also receive
scrutiny.
^23On numerous occasions, we have reported concerns related to CMS's
oversight of states' UPL arrangements, including concerns that CMS was
approving new state financing arrangements that were inappropriate and
allowing states to continue claiming excessive federal reimbursements that
were not consistent with the purpose of CMS's UPL regulations. See, for
example, GAO, Medicaid: HCFA Reversed Its Position and Approved Additional
State Financing Schemes, [45]GAO-02-147 (Washington, D.C.: Oct. 30, 2001),
and [46]GAO-04-228 .
^24In October 2001, we reported that the state's financing arrangements
for supplemental county nursing home payments inappropriately generated
hundreds of millions of dollars in federal matching funds without a
corresponding nonfederal share or an actual payment for services. See
[47]GAO-02-147 .
^25The number of states totals 30 in this instance because 1 state
provided a different response for each of the two financing arrangements
it ended.
^26The questions we sent to the states did not ask about rule making; some
states, however, volunteered this information in narrative comments on
CMS's initiative.
^27On June 1, 2004, CMS sent the Minnesota Medicaid agency a letter
disapproving Minnesota's state plan amendment to increase supplemental
payments to county nursing homes. Before this disapproval, the state and
CMS had had numerous exchanges orally and in writing about details of the
state's existing supplemental payments to county nursing homes. These
exchanges were triggered by CMS's August 5, 2003, letter to the state
requesting responses to CMS's standard funding questions. In its June
disapproval letter, CMS explained that the state had not provided
assurances to CMS that county nursing homes would retain the increased
payments and had also failed to demonstrate that the proposed amendment
would be consistent with Medicaid principles, including providing a
nonfederal share for the payments and ensuring that payments would be
economical and efficient.
^28Under Medicaid law and regulation, states can request the Administrator
of CMS to reconsider disapprovals of state plan amendments. 42 U.S.C S
1316 (2000) and 42 C.F.R. S 430.18 (2006). These appeals typically result
in a hearing before a CMS hearing officer, who reviews the evidence and
arguments presented by the appealing state and CMS and then makes a
recommendation to the CMS Administrator. The Administrator makes the final
administrative decision on whether to uphold the agency's disapproval. If
the CMS Administrator upholds a disapproval, the state may then appeal in
federal circuit court.
^29The state also argued in its appeal that the state plan amendment met
all the statutory and regulatory requirements for approval. For example,
the state argued, the amendment would result in efficient and economical
payments because the payments did not exceed the UPL for local-government
nursing homes. The state also argued that CMS violated the Social Security
Act by insisting that the state eliminate the intergovernmental transfers
of funds from the counties that owned and operated the nursing homes
receiving the payments.
^30The supplemental payment to county nursing homes was established by a
state plan amendment approved in 1994, and a state plan amendment was
submitted and approved in 2002 to increase the payment.
^31While the case involved Medicaid payments to tribal facilities and not
facilities owned and operated by state or local-government entities, CMS's
disapproval was based on the same standard that the agency applied under
its initiative, specifically, that providers did not retain the full
payment amount.
^32Alaska Dep't of Health & Soc. Servs., 424 F.3d 931, 939-40.
^33See 72 Fed. Reg. 2,236 (Jan. 18, 2007). In budget proposals for fiscal
years 2005 and 2006, the administration proposed that Congress pass
legislation to specifically prohibit federal reimbursement for state
payments to government providers that exceeded the providers' actual costs
of providing Medicaid services, but Congress did not pass such
legislation. CMS's January proposed rule sought to implement this
limitation administratively. According to CMS officials, the
administration has authority to implement such limits administratively but
proposed the legislation to ensure the program's fiscal integrity over
time. CMS's proposal is consistent with an earlier recommendation we made
to Congress: to pass legislation to specifically prohibit Medicaid
payments to any government facility that exceed costs. See GAO, Medicaid:
States Use Illusory Approaches to Shift Program Costs to Federal
Government, [48]GAO/HEHS-94-133 (Washington, D.C.: Aug. 1, 1994).
^34In the case of 1 of the 55 ended financing arrangements, CMS
communicated to the state in writing--but only in general terms--that the
state's financing arrangement was or appeared to be inconsistent with
Medicaid payment principles. CMS also provided the state a written
explanation specifying why the arrangement was inconsistent with Medicaid
payment principles in general, without specifying which principle or
principles.
^35Pub. L. No. 108-173, S 731(a), 117 Stat. 2066, 2349-51.
^36Two of the three remaining states responded "other" without providing
an explanation, and the last state did not answer the question.
^37See Department of Health and Human Services, Office of Inspector
General, Ernst & Young Final Report, Review of the Centers for Medicare &
Medicaid Services' Medicaid Financial Management Oversight (Washington,
D.C.: Sept. 25, 2006).
Conclusions
We have long been concerned about states' financing arrangements
that inappropriately boost the federal share of Medicaid program
costs without providing corresponding state dollars, thus
undermining the fiscal integrity of the federal-state partnership.
CMS's initiative is a direct attempt to address these
long-standing problems and to better ensure that states' financing
arrangements are consistent with Medicaid payment principles.
The basis for CMS's determinations under this high-profile
initiative, however--with substantial state and federal dollars at
stake--has not been transparent to states. CMS did not provide
written guidance to states; did not always explain to each state
in writing the basis for its determinations; and did not make its
determinations available to other states and interested parties as
a means of communicating its standards for allowable arrangements,
as it has done for other programs. A case-by-case review of
financing arrangements used in states' Medicaid programs is not
only appropriate but warranted in a program as complex and diverse
across states as Medicaid. Nevertheless, determinations that can
affect a state's Medicaid budget by tens of millions, or even
billions, of dollars over a number of years demand a clear basis
and an open process. The lack of transparency under CMS's
initiative has contributed to concerns about whether states have
been treated consistently; such concerns are likely to continue
unless CMS alters its oversight approach. Further, many states
have been seeking to resume supplemental payments to government
providers by seeking to make changes that respond to CMS's
objections, yet they have had little written guidance from CMS on
what changes are needed or few explanations for determinations
that CMS has made. In this federal-state Medicaid partnership, it
is appropriate that the federal government review and act upon
concerns affecting the program's fiscal integrity--and equally
appropriate for states to expect and receive a clear explanation
of what federal policy allows.
Recommendations for Executive Action
To enhance the transparency of CMS oversight and clarify and
communicate the types of allowable state financing arrangements,
we recommend that the Administrator of CMS take the following two
actions:
1. Issue guidance to clarify allowable financing arrangements,
consistent with Medicaid payment principles.
2. Provide each state CMS reviews under its initiative with
specific and written explanations regarding agency determinations
on the allowability of various arrangements for financing the
nonfederal share of Medicaid payments and make these
determinations available to all states and interested parties.
Agency Comments and Our Evaluation
We provided a draft of this report to CMS for comment on January
3, 2007, and received a written response from the agency
(reproduced in app. III). In commenting on the report, CMS
indicated that ongoing actions would respond to our first
recommendation that the agency issue guidance to states. CMS
disagreed with our second recommendation to provide states with
explanations regarding the agency's determinations.
CMS reported that the regulation proposed on January 18, 2007,
would respond to our first recommendation, that the agency issue
guidance to clarify allowable state financing arrangements. CMS
said that when finalized, the regulation will provide states with
guidance to clarify appropriate sources of nonfederal Medicaid
funds, including the use of IGTs and CPEs, and reaffirm agency
policy that health providers must retain in full the Medicaid
payments they receive. We agree that the regulation, when
finalized, could help clarify for states the allowability of
certain financing arrangements and respond to our recommendation.
We updated our report to recognize publication of the proposed
regulation after CMS received a draft of our report for review and
comment. Nevertheless, because the regulation has been proposed
but not finalized, we have maintained our recommendation in the
report.
CMS did not agree with our second recommendation to enhance the
transparency of its oversight initiative by providing states with
specific, written explanations of agency determinations on the
allowability of financing arrangements and by making these
determinations available to all states and interested parties. CMS
disagreed with the conclusion that the agency had not implemented
its initiative transparently, stating that the agency communicated
its concerns to each involved state and that its process was as
transparent as possible given variation among states' financing
arrangements. CMS cited several specific reservations about the
report's findings regarding the lack of transparency and concerns
of inconsistency and about this associated recommendation.
o CMS commented that the report confused the regulatory state plan
review process with a lack of transparency in its reviews and
determinations. CMS stated it followed the appropriate parameters
of the review process and held conference calls to understand
states' financing arrangements and discuss remaining issues. CMS
also stated that it is not standard practice to document each
communication during these processes. CMS questioned the benefit
of documenting all discussions between CMS and states and of
making them publicly available, particularly for states that have
already ended arrangements.
o CMS commented that the reported concerns about the consistency
of CMS's review are misleading and generally unfair. Highlighting
the report draft's finding that CMS's initiative was consistent
with Medicaid payment principles, CMS assumed that this conclusion
meant that states were treated in the same manner.
o CMS commented that the statistics in the report based on states'
"opinions" have little merit without supporting evidence. CMS also
said that GAO overlooked a "strong indication" that most states do
not believe they were treated unfairly or inequitably, since only
one state has appealed a determination made under the initiative.
We do not agree with CMS's view that the report confuses the state
plan review process with a lack of transparency or that the report
suggests that CMS should maintain and make publicly available
detailed records of all its discussions and communications with
state officials. The report clearly relates concerns about
transparency to the lack of information to states about the
specific bases for CMS's determinations that particular
arrangements were unallowable. We provide specific examples in
which CMS clearly communicated this information to some but not
all states and also report that such clear written communication
occurred in only one-fourth of the cases. We did not intend to
suggest, as CMS understood, that CMS communicate the basis for its
determinations retroactively, and we have clarified this point in
our report's recommendation.
We also do not agree with CMS's view that our conclusion that the
agency's initiative was consistent with Medicaid payment
principles suggests that all states were treated consistently.
This finding was related to the broader initiative and based on
what CMS officials reported as the overall basis for their
determinations. As we stated in the draft report, however, we were
unable to determine to what extent the initiative was implemented
consistently for individual states because, in most cases, a
written record of the basis for CMS's determinations did not
exist.
With regard to CMS's concerns about the reporting of states'
opinions without supporting evidence, we point to the evidence
provided in the draft report of CMS's changed approach. For
example, the draft report cited instances in which CMS had, before
its initiative, reviewed and approved states' plan amendments even
though the amendments clearly showed that the financing methods
involved were the same as those CMS later questioned under its
initiative. Finally, with regard to CMS's view that states believe
they were treated fairly because only one state appealed its
determination, we note that states could choose not to appeal a
determination for many reasons, including the time and costs
involved in doing so, and point to the states' many reported
concerns about the initiative's transparency. We found that
states' reported concerns were remarkably consistent, and we
maintain that our reporting on matters such as states' receipt of
explanations and guidance from CMS is valid.
As arranged with your offices, unless you publicly announce the
contents of this report earlier, we plan no further distribution
of this report until 30 days after its issue date. At that time,
we will send copies of the report to the Secretary of Health and
Human Services, the Administrator of the Centers for Medicare &
Medicaid Services, and other interested parties. We will also make
copies available to others upon request. In addition, the report
will be available at no charge on the GAO Web site at
http://www.gao.gov.
If you or your staff members have any questions, please contact me
at (202) 512-7118. 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 IV.
Kathryn G. Allen
Director, Health Care
Appendix I: Methodology for Determining the Number of States Ending
Financing Arrangements
Our process for determining the number of states that ended
Medicaid financing arrangements, and for determining the number of
arrangements each of the states ended as a result of the Centers
for Medicare & Medicaid Services' (CMS) oversight initiative,
involved three phases. First, we obtained from CMS its list of the
states that had ended financing arrangements; second, we contacted
all 50 states and the District of Columbia to verify CMS's data;
and, finally, we took several steps to resolve discrepancies,
identified in our review, between CMS data and information
provided by states. We limited the scope of our review to those
states we determined to have ended a financing arrangement during
the period August 2003 through August 2006.
We obtained from CMS a one-page summary spreadsheet that
identified the states that as of July 2005 had ended financing
arrangements and the particular arrangements ended. For example,
the spreadsheet indicated that several states ended arrangements
for both nursing home and hospital payments. As noted by a CMS
official, the summary spreadsheet was an internal document used
for tracking the results of the initiative and was updated
periodically. During our review, we obtained periodic updates of
this list from CMS. From July 2005 through August 2006, CMS added
two states to its list of those that had ended a financing
arrangement, and we included those states in the scope of our
review.
To assess the accuracy of the summary list provided by CMS, we
sent a standard questionnaire via e-mail to those states that CMS
identified as having ended a financing arrangement and, as part of
the questionnaire, asked the states to confirm the data provided
by CMS.^1 Specifically, we asked whether the state had ended the
particular arrangement or arrangements reported by CMS and whether
the state had ended any other arrangements not identified in CMS's
list. In addition, we interviewed officials from two groups of
states: five states that CMS suspected were using one or more
inappropriate financing arrangements that had not been ended and
three states that, according to CMS, had not submitted a proposal
to amend their state Medicaid plans and thus had not undergone a
CMS review.^2
In analyzing the data provided by CMS, states' responses to our
questionnaire, and interviews with state officials, we found one
discrepancy that could potentially have affected our findings.
Specifically, in our interviews with states, officials from one
state reported that their state had ended an arrangement, although
CMS's list indicated that it had not. According to data provided
by CMS, the state has not claimed federal reimbursement for the
arrangement in the last 4 years. A CMS official told us, however,
that the agency did not consider the state's arrangement ended
because the state had not revised its state plan. For the purposes
of our review, we concluded that the state had ended the
arrangement and included the state in our count.
Because of the differences we found between CMS's original data
provided to us and what we learned from some of the states, we
contacted all states, including those that received our
questionnaire or participated in interviews, to further test the
reliability of the information in CMS's summary list. In spring
2006, we sent a short set of questions by e-mail to all 50 states
and the District of Columbia, asking them to confirm whether CMS
had reviewed certain financing arrangements and to indicate the
outcomes of any reviews conducted. The states' responses did not
identify additional financing arrangements ended by states. We
determined that the information provided by CMS about the
states--coupled with information provided by the states through
our questionnaire, confirmation e-mail, and interviews--was
sufficiently reliable for the purposes of our review.
^1We later also sent our standard questionnaire to the two states CMS
added to its list from July 2005 through August 2006.
^2When we contacted the states CMS identified as not having submitted any
proposals to change their state Medicaid plans, officials from the three
states told us that their states had submitted proposals and undergone
several CMS reviews. These differences did not affect our findings,
however, because the state officials confirmed that their states had not
ended a payment arrangement as a result of review under CMS's initiative.
Appendix II: Methodology for Analyzing CMS Case Files
To evaluate how CMS implemented its initiative and, in particular,
the extent to which the initiative was implemented in a
transparent manner, we examined copies of CMS case files, provided
by the agency, for each review under the initiative that resulted
in a state's ending a financing arrangement. The files included
CMS and state documents, such as official letters between CMS and
states and records of e-mail correspondence, relevant to CMS's
review of the ended arrangements. We carried out a structured
content analysis of each case file to identify how and to what
extent CMS communicated in writing to the state the basis for its
determination that a state's financing arrangement was not
appropriate.
The objectives of our content analysis of CMS's files for each
state were to determine the extent to which CMS communicated in
writing to the state (1) that it found the state's financing
arrangement inconsistent with statutory or regulatory Medicaid
payment principles and (2) the reasons for CMS's determination.
For each of these two objectives, we assessed whether CMS's
written communications to the states, contained in the case files,
could be classified as specific or general.
o In regard to finding that a state's financing arrangement was
inconsistent with Medicaid payment principles, we classified CMS's
communication as specific if the agency wrote to state officials
in a letter or e-mail to inform them that the state's financing
arrangement was inconsistent with Medicaid payment principles, and
the agency specified the particular Medicaid statute, regulation,
or policy with which it was not consistent. If, on the other hand,
CMS informed the state in writing that its arrangement was
inconsistent with Medicaid payment principles but did not specify
which principle or principles, we classified the communication as
general.
o In regard to explaining the reason for its determination, we
classified CMS's communication as specific if the agency
communicated in writing to the state the reasons the state's
financing arrangement was or appeared to be inconsistent with
Medicaid payment principles. If a CMS file contained documents
that (1) described CMS's concern about a state financing
arrangement but did not clearly indicate that the arrangement was
inconsistent with Medicaid payment principles or (2) identified or
alluded to concerns with a state's financing arrangement but did
not link the concerns with any agency determination, we classified
CMS's communication as general.
If we found no evidence that CMS communicated in writing its
determination or the reasons for its determination, we classified
such cases as ones in which CMS did not communicate to the state
in writing in either general or specific terms.
Our content analysis approach was validated by GAO's research
methods staff, and a random sample of our assessments was reviewed
by GAO's general counsel staff.
Appendix III: Comments from the Centers for Medicare & Medicaid
Services
Appendix IV: GAO Contact and Staff Acknowledgments
GAO Contact
Kathryn G. Allen, (202) 512-7118 or [email protected].
Staff Acknowledgments
In addition to the contact named above, Katherine Iritani,
Assistant Director; Susan Barnidge; Tim S. Bushfield; Ellen W.
Chu; Helen Desaulniers; Ellen M. Smith; and Craig Winslow made key
contributions to this report.
Related GAO Products
Medicaid Financial Management: Steps Taken to Improve Federal
Oversight but Other Actions Needed to Sustain Efforts.
[29]GAO-06-705 . Washington, D.C.: June 22, 2006.
Medicaid: States' Efforts to Maximize Federal Reimbursements
Highlight Need for Improved Federal Oversight. [30]GAO-05-836T .
Washington, D.C.: June 28, 2005.
Medicaid Financing: States' Use of Contingency-Fee Consultants to
Maximize Federal Reimbursements Highlights Need for Improved
Federal Oversight. [31]GAO-05-748 . Washington, D.C.: June 28,
2005.
High-Risk Series: An Update. [32]GAO-05-207 . Washington, D.C.:
January 2005.
Medicaid: Intergovernmental Transfers Have Facilitated State
Financing Schemes. [33]GAO-04-574T . Washington, D.C.: March 18,
2004.
Medicaid: Improved Federal Oversight of State Financing Schemes Is
Needed. [34]GAO-04-228 . Washington, D.C.: February 13, 2004.
Major Management Challenges and Program Risks: Department of
Health and Human Services. [35]GAO-03-101 . Washington, D.C.:
January 2003.
Medicaid: HCFA Reversed Its Position and Approved Additional State
Financing Schemes. [36]GAO-02-147 . Washington, D.C.: October 30,
2001.
Medicaid: State Financing Schemes Again Drive Up Federal Payments.
[37]GAO/T-HEHS-00-193 . Washington, D.C.: September 6, 2000.
Medicaid: States Use Illusory Approaches to Shift Program Costs to
Federal Government. [38]GAO/HEHS-94-133 . Washington, D.C.: August
1, 1994.
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Highlights of [50]GAO-07-214 , a report to the Committee on Finance, U.S.
Senate
March 2007
MEDICAID FINANCING
Federal Oversight Initiative Is Consistent with Medicaid Payment
Principles but Needs Greater Transparency
The costs of Medicaid--the federal-state program financing health care for
about 60 million low-income people--totaled about $317 billion in fiscal
year 2005. Increasing budgetary pressures have created tension between the
states and the federal government, in part because some states have used
inappropriate financing arrangements to collect federal matching funds
when payments were not retained by the providers. In August 2003, the
federal Centers for Medicare & Medicaid Services (CMS) began an initiative
to end inappropriate arrangements.
GAO was asked to examine the (1) number, and fiscal effects, of states
ending particular financing arrangements; (2) extent to which CMS's
initiative represents a change in agency approach or policy; and (3)
transparency and consistency of the initiative. For states ending
arrangements, GAO surveyed state officials, reviewed CMS documents, and
interviewed CMS and state officials.
[51]What GAO Recommends
GAO recommends that the Administrator of CMS (1) issue guidance to clarify
allowable financing arrangements and (2) explain its determinations in
writing to states and interested parties. CMS said recent actions would
respond to the first recommendation. Although CMS disagreed with the
second recommendation, GAO believes it remains valid.
From August 2003 through August 2006, 29 states ended certain financing
arrangements as a result of CMS's oversight initiative. The ended
arrangements involved supplemental payments--those separate from and in
addition to the states' standard Medicaid payments--made to government
health care providers, most often government nursing homes and hospitals.
According to CMS, the arrangements had to be ended because the providers
did not retain all the payments made to them but returned all or a portion
to the states. The fiscal effects on the states and on the federal
government of ending specific arrangements were uncertain, as nearly
two-thirds of states ending arrangements were seeking to continue
obtaining federal reimbursements for the related supplemental payments by
using different financing arrangements from those they were required to
end.
CMS's initiative departs from the agency's past approach and is consistent
with Medicaid payment principles--for example, that payment for services
must be consistent with efficiency, economy, and quality of care. In the
past, CMS limited states' inappropriate financing arrangements through
means other than examining whether providers were retaining supplemental
payments. Twenty-four of 29 states reported the view that CMS had changed
its policy. One state has challenged CMS's disapproval of its state plan
amendment, in part on the grounds that CMS changed its policy and should
have gone through rule making beforehand. In another case, unrelated to
the initiative, in which a state challenged a CMS disapproval, a 2005
federal court ruling upheld CMS's determination that the state's
arrangement, in which providers did not fully retain payments, was
inconsistent with Medicaid payment principles.
CMS has not implemented its initiative transparently, contributing to
concerns about the consistency of its reviews of state financing
arrangements. CMS's initiative has lacked transparency in two ways. First,
in implementing its initiative, CMS did not issue written guidance about
the specific approval standards for state financing arrangements, although
a proposed regulation published in the Federal Register on January 18,
2007, when finalized, could provide such guidance. Second, CMS has not
always provided states with clear, written explanations of its
determinations. GAO's review of CMS documentation related to the financing
arrangements ended in 29 states found that for only one-fourth of the
financing arrangements did CMS explain to the affected states in writing
the specific basis for determining that their financing arrangements were
inconsistent with one or more Medicaid payment principles. This lack of
transparency has raised questions for some states about the consistency
with which states have been treated and precluded GAO from determining
whether CMS has treated states consistently.
References
Visible links
26. http://www.gao.gov/cgi-bin/getrpt?GAO-05-207
27. http://www.gao.gov/cgi-bin/getrpt?GAO-06-705
28. http://www.gao.gov/cgi-bin/getrpt?GAO-04-228
29. http://www.gao.gov/cgi-bin/getrpt?GAO-06-705
30. http://www.gao.gov/cgi-bin/getrpt?GAO-05-836T
31. http://www.gao.gov/cgi-bin/getrpt?GAO-05-748
32. http://www.gao.gov/cgi-bin/getrpt?GAO-05-207
33. http://www.gao.gov/cgi-bin/getrpt?GAO-04-574T
34. http://www.gao.gov/cgi-bin/getrpt?GAO-04-228
35. http://www.gao.gov/cgi-bin/getrpt?GAO-03-101
36. http://www.gao.gov/cgi-bin/getrpt?GAO-02-147
37. http://www.gao.gov/cgi-bin/getrpt?GAO/T-HEHS-00-193
38. http://www.gao.gov/cgi-bin/getrpt?GAO/HEHS-94-133
45. http://www.gao.gov/cgi-bin/getrpt?GAO-02-147
46. http://www.gao.gov/cgi-bin/getrpt?GAO-04-228
47. http://www.gao.gov/cgi-bin/getrpt?GAO-02-147
48. http://www.gao.gov/cgi-bin/getrpt?GAO/HEHS-94-133
50. http://www.gao.gov/cgi-bin/getrpt?GAO-07-214
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