Medicaid Financing: Long-Standing Concerns about Inappropriate	 
State Arrangements Support Need for Improved Federal Oversight	 
(01-NOV-07, GAO-08-255T).					 
                                                                 
Medicaid, a joint federal-state program, financed the health care
for about 60 million low-income people in fiscal year 2005.	 
States have considerable flexibility in deciding what medical	 
services and individuals to cover and the amount to pay 	 
providers, and the federal government reimburses a proportion of 
states' expenditures according to a formula established by law.  
The Centers for Medicare & Medicaid Services (CMS) is the federal
agency responsible for overseeing Medicaid. Growing pressures on 
federal and state budgets have increased tensions between the	 
federal government and states regarding this program, including  
concerns about whether states were appropriately financing their 
share of the program. GAO's testimony describes findings from	 
prior work conducted from 1994 through March 2007 on (1) certain 
inappropriate state Medicaid financing arrangements and their	 
implications for Medicaid's fiscal integrity, and (2) outcomes	 
and transparency of a CMS oversight initiative begun in 2003 to  
end such inappropriate arrangements.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-255T					        
    ACCNO:   A77894						        
  TITLE:     Medicaid Financing: Long-Standing Concerns about	      
Inappropriate State Arrangements Support Need for Improved	 
Federal Oversight						 
     DATE:   11/01/2007 
  SUBJECT:   Budget obligations 				 
	     Federal aid to states				 
	     Federal funds					 
	     Federal regulations				 
	     Federal social security programs			 
	     Federal/state relations				 
	     Health care programs				 
	     Medicaid						 
	     Standards						 

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GAO-08-255T

   

     * [1]Background
     * [2]Concerns about Certain Medicaid Financing Arrangements that

          * [3]Inappropriate Medicaid Financing Arrangements Undermine Medi

     * [4]CMS Oversight Initiative to End State Financing Arrangements
     * [5]Concluding Observations
     * [6]Contact and Acknowledgments
     * [7]Related GAO Products

          * [8]Order by Mail or Phone

     * [9]PDF6-Ordering Information-Young-10-25-07.pdf

          * [10]GAO's Mission
          * [11]Obtaining Copies of GAO Reports and Testimony

               * [12]Order by Mail or Phone

          * [13]To Report Fraud, Waste, and Abuse in Federal Programs
          * [14]Congressional Relations
          * [15]Public Affairs

Testimony

Before the Committee on Oversight and Government Reform, House of
Representatives

United States Government Accountability Office

GAO

For Release on Delivery
Expected at 10:00 a.m. EDT
Thursday, November 1, 2007

MEDICAID FINANCING

Long-Standing Concerns about Inappropriate State Arrangements Support Need
for Improved Federal Oversight

Statement of Dr. Marjorie Kanof, Managing Director
Health Care

GAO-08-255T

Mr. Chairman and Members of the Committee:

I am pleased to be here today as you explore recent regulatory actions of
the administration related to the Medicaid program and the potential
effects of these actions on patients, providers, and states. Medicaid, a
joint federal and state program that covered about 60 million people in
fiscal year 2005, fulfills a crucial role in providing health coverage for
a variety of vulnerable populations, including certain low-income
children, families, and individuals who are aged or disabled. Ensuring the
program's long-term sustainability is therefore very important.

The federal government and the states share responsibilities for financing
and administering Medicaid. Within broad federal requirements, states have
considerable flexibility in deciding what medical services and individuals
to cover and the amount to pay providers, and the federal government
reimburses a proportion of states' expenditures according to a formula
established by law.^1 The Centers for Medicare & Medicaid Services (CMS)
is the federal agency responsible for overseeing states' Medicaid programs
and ensuring the propriety of expenditures for which states seek federal
reimbursement. Total Medicaid expenditures are significant and growing,
totaling an estimated $317 billion in fiscal year 2005, and are expected
to continue to grow.^2

Growing pressures on federal and state budgets have increased tensions
between the federal government and the states regarding Medicaid. In
recent years, tensions have arisen regarding CMS's actions in overseeing
the appropriateness of provider payments for which states have sought
federal reimbursement, including whether states were appropriately
financing their share, that is, the nonfederal share of these payments.
Starting in the early 1990's and as recently as 2005, we and others have
reviewed aspects of inappropriate Medicaid financing arrangements in some
states, often involving supplemental payments made to government providers
that were above and beyond states' typical Medicaid payment rates. We have
also reviewed CMS's oversight of such arrangements, most recently
reporting in March 2007 on an initiative started in 2003 to end
inappropriate arrangements. In May 2007 CMS issued a final rule that would
affect state Medicaid financing arrangements. In my testimony today I will
summarize and describe our findings (1) on past inappropriate state
Medicaid financing arrangements, including their implications for the
fiscal integrity of the Medicaid program; and (2) on the outcomes and
transparency of CMS's 2003 initiative, which provides context for
considering the effect of the May rule on various stakeholders. My
testimony is based on our previous work assessing various Medicaid
financing arrangements and federal oversight of these arrangements. We
conducted this body of work from June 1993 through March 2007. We have not
reported on CMS's May 2007 rule. We conducted our work in accordance with
generally accepted government auditing standards.

^1States and the federal government share in Medicaid expenditures. The
federal share can range from 50 to 83 percent.

^2This figure represents estimated federal and state Medicaid program
expenditures for provider services and administration in fiscal year 2005.

In summary, we have reported for more than a decade on varied financing
arrangements that inappropriately increase federal Medicaid matching
payments. In reports issued from 1994 through 2005, we reported on various
arrangements whereby states received federal matching funds by paying
certain government providers, such as county owned or operated nursing
homes, amounts that greatly exceeded established Medicaid rates.^3 The
large payments were often temporary since some states required the
government providers to return all or most of the money to the states.
States used the federal matching funds received for these payments--which
essentially made a round-trip from the states to providers and back to the
states--at their own discretion. Such financing arrangements had
significant fiscal implications for the federal government and states. The
exact amount of additional federal Medicaid funds generated through these
arrangements is not known, but was in the billions of dollars. Despite
congressional and CMS action taken during those years to limit such
arrangements, we found in recent years that improved federal oversight of
such arrangements was needed. Because such financing arrangements
effectively increase the federal Medicaid share above what is established
by law, they threaten the fiscal integrity of Medicaid's federal and state
partnership. They shift costs inappropriately from the states to the
federal government, and take funding intended for Medicaid providers, who
do not under these arrangements retain the full payments.

CMS's oversight initiative, started in 2003 to end inappropriate state
financing arrangements, by August 2006 had resulted in 29 states ending
financing arrangements in which providers did not retain the supplemental
payments they received. Although we found that CMS's initiative was
consistent with Medicaid payment principles, we also found that more
transparency was needed regarding the way in which CMS was implementing
its initiative and the review standards it was using to end certain
financing arrangements. For example, to inform states about the specific
standards it used for reviewing and approving states' financing
arrangements under its new initiative, CMS had not used any of the means
by which it typically provides information to states about the Medicaid
program, such as its published state Medicaid manual, standard letters
issued to all state Medicaid directors, or technical guidance manuals.
Consequently, states were concerned about standards that were applied in
CMS's review of their arrangements and the consistency with which states
were treated. These observations provide some context for the controversy
surrounding CMS's May 2007 rule. We have not reported on CMS's May 2007
rule or other rules related to Medicaid financing issued this year. The
extent to which the rule will address concerns about the transparency of
CMS's initiative and review standards will depend on how CMS implements
it.

^3See related GAO products at the end of this statement.

Background

Title XIX of the Social Security Act establishes Medicaid as a joint
federal-state program to finance health care for certain low-income
children, families, and individuals who are aged or disabled.^4 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.^5

CMS has an important role in ensuring that states comply with statutory
Medicaid payment principles when claiming federal reimbursements for
payments made to institutional and other providers who serve Medicaid
beneficiaries. For example, Medicaid payments must be "consistent with
efficiency, economy, and quality of care,"^6 and states must share in
Medicaid costs in proportions established according to a statutory
formula.^7

^4 42 U.S.C. SS 1396 et seq. (2000).

^5Throughout this statement, 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."

^6See 42 U.S.C. S 1396a(a)(30)(A) (2000).

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, nursing home care, and inpatient hospital care), and the rates
of and methods for calculating payments to providers. State 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 the nonfederal share from
local sources, as long as the state itself contributes at least 40
percent.^8

Over the last several years, CMS has taken a number of steps to help
ensure the fiscal integrity of the Medicaid program. These include making
internal organizational changes that centralize the review of states'
Medicaid financing arrangements and hiring additional staff to review each
state's Medicaid financing. The agency also published in May 2007 a final
rule related to Medicaid payment and financing.^9 This rule would, among
other things, limit payments to government providers to their cost of
providing Medicaid services. The Secretary is prohibited by law from
implementing the rule until May 25, 2008.^10

^7Under the formula, the federal government may pay from 50 to 83 percent
of a state's Medicaid expenditures. States with lower per capita incomes
receive higher federal matching rates. 42 U.S.C. S 1396d(b) (2000).

^8See 42 U.S.C. S 1396a(a)(2) (2000). Local governments and local
government providers can contribute to the nonfederal share of Medicaid
payments through mechanisms known as intergovernmental transfers, or IGTs.
IGTs are a legitimate feature in state finance that enable state and local
governments to carry out their shared governmental functions, for example
through the transfer of revenues between governmental entities.

^9See 72 Fed. Reg. 29,748 (May 29, 2007).

^10See Pub. L. No. 110-28, S 7002, 121 Stat. 112, 187 (2007).

Concerns about Certain Medicaid Financing Arrangements that Undermine Medicaid's
Fiscal Integrity Are Long-Standing

From 1994 to 2005, we have reported numerous times on a number of
financing arrangements that create the illusion of a valid state Medicaid
expenditure to a health care provider. Payments under these arrangements
have enabled states to claim federal matching funds regardless of whether
the program services paid for had actually been provided. As various
schemes have come to light, Congress and CMS took several actions from
1987 through 2002, through law and regulation, to curtail them (see table
1).

Table 1: Medicaid Financing Schemes Used to Inappropriately Generate
Federal Payments and Federal Actions to Address Them, 1987-2002

Financing arrangement Description                 Action taken             
Excessive payments to States made excessive       In 1987, the Health Care 
state health          Medicaid payments to        Financing Administration 
facilities            state-owned health          (HCFA) issued            
                         facilities, which           regulations that         
                         subsequently returned these established payment      
                         funds to the state          limits specifically for  
                         treasuries.                 inpatient and            
                                                     institutional facilities 
                                                     operated by states.      
Provider taxes and    Revenues from               The Medicaid Voluntary   
donations             provider-specific taxes on  Contribution and         
                         hospitals and other         Provider-Specific Tax    
                         providers and from provider Amendments of 1991       
                         "donations" were matched    essentially barred       
                         with federal funds and paid certain provider         
                         to the providers. These     donations, placed a      
                         providers could then return series of restrictions   
                         most of the federal payment on provider taxes, and   
                         to the states.              set other restrictions   
                                                     for state contributions. 
Excessive             DSH payments are meant to   The Omnibus Budget       
disproportionate      compensate those hospitals  Reconciliation Act of    
share hospital (DSH)  that care for a             1993 placed limits on    
payments              disproportionate number of  which hospitals could    
                         low-income patients.        receive DSH payments and 
                         Unusually large DSH         capped both the amount   
                         payments were made to       of DSH payments states   
                         certain hospitals, which    could make and the       
                         then returned the bulk of   amount individual        
                         the state and federal funds hospitals could receive. 
                         to the state.                                        
Excessive DSH         A large share of DSH        The Balanced Budget Act  
payments to state     payments were paid to       of 1997 limited the      
mental hospitals      state-operated psychiatric  proportion of a state's  
                         hospitals, where they were  DSH payments that can be 
                         used to pay for services    paid to state            
                         not covered by Medicaid or  psychiatric hospitals.   
                         were returned to the state                           
                         treasuries.                                          
Upper payment limit   In an effort to ensure that The Medicare, Medicaid,  
(UPL) for local       Medicaid payments are       and SCHIP Benefits       
government health     reasonable, federal         Improvement and          
facilities            regulations prohibit        Protection Act of 2000   
                         Medicaid from paying more   required HCFA to issue a 
                         than a reasonable estimate  final regulation that    
                         of the amount that would be established a separate   
                         paid under Medicare payment payment limit for each   
                         principles for comparable   of several classes of    
                         services. This UPL applies  local government health  
                         to payments aggregated      facilities. In 2002, CMS 
                         across a class of           issued a regulation that 
                         facilities and not for      further lowered the      
                         individual facilities. As a payment limit for local  
                         result of the aggregate     public hospitals.        
                         upper limit, states were                             
                         able to make large                                   
                         supplemental payments to a                           
                         few local public health                              
                         facilities, such as                                  
                         hospitals and nursing                                
                         homes. The local government                          
                         health facilities then                               
                         returned the bulk of the                             
                         state and federal payments                           
                         to the states.                                       

Source: GAO, Medicaid: Intergovernmental Transfers Have Facilitated State
Financing Schemes, [16]GAO-04-547T (Washington, D.C.; Mar. 18, 2004).

Note: Before June 2001, CMS was known as the Health Care Financing
Administration (HCFA).

Many of these arrangements involve payment arrangements between the state
and government-owned or government-operated providers, such as
local-government-operated nursing homes. They also involved supplemental
payments--payments states made to these providers 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,
however, because states required these government providers to return part
or all of the payments to the states.^11 Because government entities were
involved, all or a portion of the supplemental payments could be returned
to the state through an intergovernmental transfer, or IGT. Financing
arrangements involving illusory payments to Medicaid providers have
significant fiscal implications for the federal government and states. The
exact amount of additional federal Medicaid funds generated through these
arrangements is not known, but was in the billions of dollars. For
example, a 2001 regulation to curtail misuse of the UPL regulation was
estimated to have saved the federal government approximately $17 billion
from fiscal year 2002 through fiscal year 2006. In 2003, we designated
Medicaid to be a program at high risk of mismanagement, waste, and abuse,
in part due to concerns about states' use of inappropriate financing
arrangements.^12

Inappropriate Medicaid Financing Arrangements Undermine Medicaid's Fiscal
Integrity

States' use of these creative financing mechanisms undermined the
federal-state Medicaid partnership as well as the program's fiscal
integrity in three ways. First, inappropriate state financing arrangements
effectively increased the federal matching rate established under federal
law by increasing federal expenditures while state contributions remained
unchanged or even decreased. Figure 1 illustrates a state's arrangement in
place in 2004 in which the state increased federal expenditures without a
commensurate increase in state spending. 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 just
$2 million. Creating the illusion of a $41 million hospital payment when
only $2 million was actually retained by the provider enabled the state to
obtain additional federal reimbursements without effectively contributing
a nonfederal share--in this case, the state actually netted $28.5 million
as a result of the arrangement.

^11The two most common supplemental payments that involved illusory
payments to government providers are upper payment limit, or UPL, payments
and disproportionate share hospital, or DSH, payments. Illusory UPL
payments are based on the misuse of Medicaid UPL provisions. UPLs are the
federal government's way of placing a ceiling on the federal share of a
state Medicaid program; they are the upper bound on the amounts the
federal government will pay a state for the federal share of state
spending on certain services. Some states made supplemental payments up to
the UPL but then required the providers to return all or a portion of the
payment. 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.

^12GAO, Major Management Challenges and Program Risks: Department of
Health and Human Services, [17]GAO-03-101 (Washington, D.C.: January
2003).

Figure 1: Example of How One State Increased Federal Medicaid Matching
Funds without Increasing State Spending

Second, CMS had no assurance that these increased federal matching
payments were retained by the providers and used to pay for Medicaid
services. Federal Medicaid matching funds are intended for
Medicaid-covered services for the Medicaid-eligible individuals on whose
behalf payments are made. Under these arrangements, however, payments for
such Medicaid-covered services were returned to the states which could
then use the returned funds at their own discretion. In 2004, we examined
how six states with large supplemental payment financing arrangements
involving nursing homes used the federal funds they generated. As in the
past, some states deposited excessive funds from financing arrangements
into their general funds, which may or may not be used for Medicaid
purposes. Table 2 provides further information on how states used their
funds from supplemental payment arrangements, as reported by the six
states we reviewed in 2004.

Table 2: Selected States' Use of Funds Generated through UPL Arrangements,
as of January 2004

State        Use                                                           
Michigan     Funds generated by the state's UPL arrangement were deposited 
                in the state's general fund but were tracked separately as a  
                local fund source. These local funds were earmarked for       
                future Medicaid expenses and used as the state match,         
                effectively recycling federal UPL matching funds to generate  
                additional federal Medicaid matching funds.                   
New York     Funds generated by the state's UPL arrangement were deposited 
                into its Medical Assistance Account. Proceeds from this       
                account were used to pay for the state share of the cost of   
                Medicaid payments, effectively recycling federal funds to     
                generate additional federal Medicaid matching funds.          
Oregon       Funds generated by the state's UPL arrangement were used to   
                finance education programs and other non-Medicaid health      
                programs. UPL matching funds recouped from providers were     
                deposited into a special UPL fund. Facing a large budget      
                deficit, a February 2002 special session of the Oregon        
                legislature allocated the fund balance, about $131 million,   
                to finance kindergarten to 12th grade education programs.     
                According to state budget documents, the UPL funds were used  
                to replace financing from the state's general fund.           
Pennsylvania Funds generated by the state's UPL arrangement were used for  
                a number of Medicaid and non-Medicaid purposes, including     
                long-term care and behavioral health services. In state       
                fiscal years 2001-2003 the state generated $2.4 billion in    
                excess federal matching funds, of which 43 percent was used   
                for Medicaid expenses (recycled to generate additional        
                federal matching funds), 6 percent was used for non-Medicaid  
                purposes, and 52 percent was unspent and available for        
                non-Medicaid uses (does not total 100 percent because of      
                rounding).                                                    
Washington   Funds generated by the state's UPL arrangement were           
                commingled with a number of other revenue sources in a state  
                fund. The fund was used for various state health programs,    
                including a state-funded basic health plan, public health     
                programs, and health benefits for home care workers. A        
                portion of the fund was also transferred to the state's       
                general fund. The fund was also used for selected Medicaid    
                services and the State Children's Health Insurance Program    
                (SCHIP), which effectively recycled the federal funds to      
                generate additional federal Medicaid matching funds.          
Wisconsin    Funds generated by the state's UPL arrangement were deposited 
                in a state fund, which was used to pay for Medicaid-covered   
                services in both public and private nursing homes. Because    
                the state used these payments as the state share, the federal 
                funds were effectively recycled to generate additional        
                federal Medicaid matching funds.                              

Source: CMS and states.

Note: Information is based on work ending in January 2004. See GAO,
Medicaid: Improved Federal Oversight of State Financing Schemes Is Needed,
[18]GAO-04-228 (Washington, D.C.: Feb. 13, 2004).

Third, these state financing arrangements undermined the fiscal integrity
of the Medicaid program because they enabled states to make payments to
government providers that significantly exceeded their costs. In our view,
this practice was inconsistent with the statutory requirement that states
adopt methods to ensure that Medicaid payments are consistent with economy
and efficiency.

CMS Oversight Initiative to End State Financing Arrangements Lacked Transparency

Our March 2007 report^13 on a recent CMS oversight initiative to end
certain financing arrangements where providers did not retain the payments
provides context for CMS's May rule. Responding to concerns about states'
continuing use of creative financing arrangements to shift costs to the
federal government, CMS has taken steps starting in August 2003 to end
inappropriate state financing arrangements by closely reviewing state plan
amendments on a state-by-state basis. As a result of CMS initiative, from
August 2003 through August 2006, 29 states ended one or more arrangements
for financing supplemental payments, because providers were not retaining
the Medicaid payments for which states had received federal matching
funds.

We found CMS's actions under its oversight initiative to be consistent
with Medicaid payment principles--for example, that payment for services
be consistent with efficiency and economy. We also found, however, that
CMS's initiative to end inappropriate financing arrangements lacked
transparency, in that CMS had not issued written guidance about the
specific approval standards for state financing arrangements. CMS's
initiative was a departure from the agency's past oversight approach,
which did not focus on whether individual providers were retaining the
supplemental payments they received. In contacting the 29 states that
ended a financing arrangement from August 2003 through August 2006 under
the initiative, only 8 states reported they had received any written
guidance or clarification from CMS regarding appropriate and inappropriate
financing arrangements. CMS had not used any of the means by which it
typically provides information to states about the Medicaid program, such
as its published state Medicaid manual, standard letters issued to all
state Medicaid directors, or technical guidance manuals, to inform states
about the specific standards it used for reviewing and approving states'
financing arrangements. State officials 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. Twenty-four of 29 states reported
that CMS had changed its policy regarding financing arrangements, and 1
state challenged CMS's disapproval of its state plan amendment, in part on
the grounds that CMS changed its policy regarding payment arrangements
without rule making.^14 The lack of transparency in CMS's review standards
raised questions about the consistency with which states had been treated
in ending their financing arrangements. We consequently recommended that
CMS issue guidance to clarify allowable financing arrangements.

^13GAO, Medicaid Financing: Federal Oversight Initiative is Consistent
with Medicaid with Medicaid Payment Principles but Needs Greater
Transparency, [19]GAO-07-214 (Washington, D.C.: Mar. 30, 2007).

Our recommendation for CMS to issue guidance for allowable financing
arrangements paralleled a recommendation we had made in earlier work
reviewing states' use of consultants on a contingency-fee basis to
maximize federal Medicaid revenues.^15 Our work found problematic projects
where claims for federal matching funds appeared to be inconsistent with
CMS's policy or with federal law, or that--as with inappropriate
supplemental payment arrangements--undermined Medicaid's fiscal integrity.
Several factors contributed to the risk of state projects. Many were in
areas where federal requirements had been inconsistently applied,
evolving, or not specific. We recommended that CMS establish or clarify
and communicate its policies in these areas, including supplemental
payment arrangements.^16 CMS responded that clarifying guidance was under
development for targeted case management, rehabilitation services, and
supplemental payment arrangements.

We have recently initiated work to examine CMS's current oversight of
certain types of state financing arrangements. We have not reported on
CMS's May 2007 rule or other rules related to Medicaid financing issued
this year. The extent to which the rule will address concerns about the
transparency of CMS's initiative and review standards will depend on how
CMS implements it.

^14This state formally requested that the CMS Administrator reconsider the
disapproval of the state plan amendment. The Administrator upheld the
disapproval, finding the state's argument that CMS was required to use
notice-and-comment rule making unsupported. The United States Court of
Appeals for the Eighth Circuit denied the state's appeal of this decision.
Minnesota v. Ctrs. for Medicare and Medicaid Servs., 495 F.3d 991 (8th
Cir. 2007).

^15See GAO, Medicaid Financing: States' Use of Contingency-Fee Consultants
to Maximize Federal Reimbursements Highlights Need for Improved Federal
Oversight, GAO-05-748 (Washington, D.C.: June 28, 2005).

^16Other areas where we found federal law and policies had been
inconsistently applied, evolving, or not specific included targeted case
management services, rehabilitation services, and Medicaid administrative
costs. We found that states' claims in some of these categories had grown
substantially in dollar amounts. For example, during fiscal years 1999
through 2003, combined state and federal spending for targeted case
management services increased by 76 percent, from $1.7 billion to $3.0
billion, across all states.

Concluding Observations

As the nation's health care safety net, the Medicaid program is of
critical importance to beneficiaries and the providers that serve them.
The federal government and states have a responsibility to administer the
program in a manner that assures expenditures benefit those low-income
people for whom benefits were intended. With annual expenditures totaling
more than $300 billion per year and growing, accountability for the
significant program expenditures is critical to providing those
assurances. The program's long-term fiscal sustainability is important for
beneficiaries, providers, states, and the federal government.

For more than a decade, we have reported on various methods that states
have used to inappropriately maximize federal Medicaid reimbursement, and
we have made recommendations to end these inappropriate financing
arrangements. Supplemental payments involving government providers have
resulted in billions of excess federal dollars for states, yet
accountability for these payments--assurances that they are retained by
providers of Medicaid services to Medicaid beneficiaries--has been
lacking. CMS has taken important steps in recent years to improve its
financial management of Medicaid. Yet more can be done to enhance the
transparency of CMS oversight. Consequently, we believe our
recommendations regarding the clarification and communication of allowable
financing arrangements remain valid.

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

Contact and Acknowledgments

For future contacts regarding this testimony, please contact Marjorie
Kanof at (202) 512-7114 or [email protected]. Katherine Iritani, Assistant
Director; Ted Burik; Tim Bushfield; Tom Moscovitch; and Terry Saiki made
key contributions to this statement.

Related GAO Products

Medicaid Financing: Federal Oversight Initiative Is Consistent with
Medicaid Payment Principles but Needs Greater Transparency. [20]GAO-07-214
. Washington, D.C.: March 30, 2007.

Medicaid Financial Management: Steps Taken to Improve Federal Oversight
but Other Actions Needed to Sustain Efforts. [21]GAO-06-705 . Washington,
D.C.: June 22, 2006.

Medicaid: States' Efforts to Maximize Federal Reimbursements Highlight
Need for Improved Federal Oversight. [22]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.
[23]GAO-05-748 . Washington, D.C.: June 28, 2005.

High-Risk Series: An Update. [24]GAO-05-207 . Washington, D.C.: January
2005.

Medicaid: Intergovernmental Transfers Have Facilitated State Financing
Schemes. [25]GAO-04-574T . Washington, D.C.: March 18, 2004.

Medicaid: Improved Federal Oversight of State Financing Schemes Is Needed.
[26]GAO-04-228 . Washington, D.C.: February 13, 2004.

Major Management Challenges and Program Risks: Department of Health and
Human Services. [27]GAO-03-101 . Washington, D.C.: January 2003.

Medicaid: HCFA Reversed Its Position and Approved Additional State
Financing Schemes. [28]GAO-02-147 . Washington, D.C.: October 30, 2001.

Medicaid: State Financing Schemes Again Drive Up Federal Payments.
[29]GAO/T-HEHS-00-193 . Washington, D.C.: September 6, 2000.

Medicaid: States Use Illusory Approaches to Shift Program Costs to Federal
Government. GAO/HEHS-94-133. Washington, D.C.: August 1, 1994.

(290679)

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Highlights of [31]GAO-08-255T , a testimony before the Committee on
Oversight and Government Reform, House of Representatives

November 1, 2007

MEDICAID FINANCING

Long-Standing Concerns about Inappropriate State Arrangements Support Need
for Improved Federal Oversight

Medicaid, a joint federal-state program, financed the health care for
about 60 million low-income people in fiscal year 2005. States have
considerable flexibility in deciding what medical services and individuals
to cover and the amount to pay providers, and the federal government
reimburses a proportion of states' expenditures according to a formula
established by law. The Centers for Medicare & Medicaid Services (CMS) is
the federal agency responsible for overseeing Medicaid.

Growing pressures on federal and state budgets have increased tensions
between the federal government and states regarding this program,
including concerns about whether states were appropriately financing their
share of the program. GAO's testimony describes findings from prior work
conducted from 1994 through March 2007 on (1) certain inappropriate state
Medicaid financing arrangements and their implications for Medicaid's
fiscal integrity, and (2) outcomes and transparency of a CMS oversight
initiative begun in 2003 to end such inappropriate arrangements.

GAO has reported for more than a decade on varied financing arrangements
that inappropriately increase federal Medicaid matching payments. In
reports issued from 1994 through 2005, GAO found that some states had
received federal matching funds by paying certain government providers,
such as county operated nursing homes, amounts that greatly exceeded
established Medicaid rates. States would then bill CMS for the federal
share of the payment. However, these large payments were often temporary,
since some states required the providers to return most or all of the
amount. States used the federal matching funds obtained in making these
payments as they wished. Such financing arrangements had significant
fiscal implications for the federal government and states. The exact
amount of additional federal Medicaid funds generated through these
arrangements is unknown, but was in the billions of dollars. Because such
financing arrangements effectively increase the federal Medicaid share
above what is established by law, they threaten the fiscal integrity of
Medicaid's federal and state partnership. They shift costs inappropriately
from the states to the federal government, and take funding intended for
covered Medicaid costs from providers, who do not under these arrangements
retain the full payments.

In 2003, CMS began an oversight initiative that by August 2006 resulted in
29 states ending inappropriate financing arrangements. Under the
initiative, CMS sought satisfactory assurances that a state was ending
financing arrangements that the agency found to be inappropriate.
According to CMS, the arrangements had to be ended because the providers
did not retain all payments made to them but returned all or a portion to
the states. GAO reported in 2007 that, although CMS's initiative was
consistent with Medicaid payment principles, it was not transparent in
implementation. CMS had not used any of the means by which it normally
provides states with information about Medicaid program requirements, such
as the published state Medicaid manual, standard letters issued to all
state Medicaid directors, or technical guidance manuals. Such guidance
could be helpful to inform states about the specific standards it used for
reviewing and approving states' financing arrangements. In May 2007, CMS
issued a final rule that would limit Medicaid payments to government
providers' costs. GAO has not reported on CMS's rule.

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References

Visible links
  16. http://www.gao.gov/cgi-bin/getrpt?GAO-04-547T
  17. http://www.gao.gov/cgi-bin/getrpt?GAO-03-101
  18. http://www.gao.gov/cgi-bin/getrpt?GAO-04-228
  19. http://www.gao.gov/cgi-bin/getrpt?GAO-07-214
  20. http://www.gao.gov/cgi-bin/getrpt?GAO-07-214
  21. http://www.gao.gov/cgi-bin/getrpt?GAO-06-705
  22. http://www.gao.gov/cgi-bin/getrpt?GAO-05-836T
  23. http://www.gao.gov/cgi-bin/getrpt?GAO-05-748
  24. http://www.gao.gov/cgi-bin/getrpt?GAO-05-207
  25. http://www.gao.gov/cgi-bin/getrpt?GAO-04-574T
  26. http://www.gao.gov/cgi-bin/getrpt?GAO-04-228
  27. http://www.gao.gov/cgi-bin/getrpt?GAO-03-101
  28. http://www.gao.gov/cgi-bin/getrpt?GAO-02-147
  29. http://www.gao.gov/cgi-bin/getrpt?GAO/T-HEHS-00-193
  30. http://www.gao.gov/cgi-bin/getrpt?GAO-08-255T
  31. http://www.gao.gov/cgi-bin/getrpt?GAO-08-255T
  32. http://www.gao.gov/
  33. http://www.gao.gov/
  34. http://www.gao.gov/fraudnet/fraudnet.htm
  35. mailto:[email protected]
  36. mailto:[email protected]
  37. mailto:[email protected]
*** End of document. ***