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 CMSï¿½s
		   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.
		   
		   CMSï¿½s 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.
		   
		   CMSï¿½s 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
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(290462)

www.gao.gov/cgi-bin/getrpt?GAO-07-214 .

To view the full product, including the scope
and methodology, click on the link above.

For more information, contact Kathryn G. Allen at (202) 512-7118 or
[email protected].

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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