Medicaid Financing: Long-standing Concerns about Inappropriate	 
State Arrangements Support Need for Improved Federal Oversight	 
(03-APR-08, GAO-08-650T).					 
                                                                 
Medicaid, a joint federal-state program, financed the health care
for about 59 million low-income people in fiscal year 2006.	 
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 portion 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-08-650T					        
    ACCNO:   A81557						        
  TITLE:     Medicaid Financing: Long-standing Concerns about	      
Inappropriate State Arrangements Support Need for Improved	 
Federal Oversight						 
     DATE:   04/03/2008 
  SUBJECT:   Accountability					 
	     Federal aid to states				 
	     Federal funds					 
	     Federal law					 
	     Federal/state relations				 
	     Financial analysis 				 
	     Financial management				 
	     Funds management					 
	     Health care cost control				 
	     Health care costs					 
	     Health care programs				 
	     Health care services				 
	     Investigations by federal agencies 		 
	     Medicaid						 
	     Medicare						 
	     Payments						 
	     Program management 				 
	     Requirements definition				 
	     Standards evaluation				 
	     State-administered programs			 
	     Government agency oversight			 
	     Transparency					 
	     GAO High Risk Series				 
	     Medicaid Program					 

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GAO-08-650T

   

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Testimony: 

Before the Subcommittee on Health, Committee on Energy and Commerce, 
House of Representatives: 

United States Government Accountability Office: 

GAO: 

For Release on Delivery Expected at 10:00 a.m. EDT: 

Thursday, April 3, 2008: 

Medicaid Financing: 

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

Statement of James Cosgrove, Acting Director: 

Health Care: 

GAO-08-650T: 

GAO Highlights: 

Highlights of GAO-08-650T, a testimony before the Subcommittee on 
Health, Committee on Energy and Commerce, House of Representatives. 

Why GAO Did This Study: 

Medicaid, a joint federal-state program, financed the health care for 
about 59 million low-income people in fiscal year 2006. 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 portion of statesï¿½ 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. GAOï¿½s testimony describes findings from 
prior work conducted from 1994 through March 2007 on (1) certain 
inappropriate state Medicaid financing arrangements and their 
implications for Medicaidï¿½s fiscal integrity and (2) outcomes and 
transparency of a CMS oversight initiative begun in 2003 to end such 
inappropriate arrangements. 

What GAO Found: 

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 Medicaidï¿½s 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 one or more 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 CMSï¿½s 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 by informing states about the specific standards used for 
reviewing and approving statesï¿½ financing arrangements. In May 2007, 
CMS issued a final rule that, if implemented, would, among other 
things, limit Medicaid payments to government providersï¿½ costs. We have 
not reviewed the substance of the May 2007 rule. The extent to which 
the May 2007 rule would respond to GAOï¿½s concerns about the 
transparency of CMSï¿½s initiative and review standards will depend on 
how CMS implements it. 

To view the full product, including the scope and methodology, click on 
[hyperlink,http://www.gao.gov/cgi-bin/getrpt?GAO-08-613T]. For more 
information, contact Robert A. Robinson at (202) 512-3841 or 
[email protected]. 

[End of section] 

Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here today as you explore recent regulatory actions 
of the administration related to the Medicaid program and the potential 
impacts of these actions on beneficiaries, providers, and states. 
Medicaid, a joint federal and state program that covered over 59 
million people in fiscal year 2006, 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 portion of states' 
expenditures according to a formula established by law.[Footnote 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, totaling an estimated $317 
billion in fiscal year 2006.[Footnote 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 1990s and as recently as 2004, we 
and others have reviewed aspects of inappropriate Medicaid financing 
arrangements in some states, often involving supplemental payments made 
to government providers that were 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. Since 2007, CMS has 
issued a series of proposed or final rules related to payments for 
certain Medicaid services. These rules are the subject of H.R. 
5613[Footnote 3]--which would place a moratorium on the rules--and of 
today's hearing. One of those rules, issued as a final rule in May 
2007,[Footnote 4] relates to a body of work GAO has conducted since the 
early 1990s on state Medicaid financing arrangements. In my testimony 
today, I will summarize and describe our findings on (1) past 
inappropriate state Medicaid financing arrangements, including their 
implications for the fiscal integrity of the Medicaid program, and (2) 
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 the proposed and final rules that 
are addressed in H.R. 5613, with respect to the operation of the 
Medicaid program. We conducted our work in accordance with generally 
accepted government auditing standards. 

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 county- 
operated nursing homes, amounts that greatly exceeded standard Medicaid 
rates.[Footnote 5] The large payments were often temporary, since some 
states could require 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 even in recent years that improved federal oversight of such 
arrangements was still needed.[Footnote 6] 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 beneficiaries and covered Medicaid costs from 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 
one or more 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 new or revised Medicaid program requirements, such as 
proposed rule making, its published state Medicaid manual, standard 
letters issued to all state Medicaid directors, and 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 assessed 
this rule, or others addressed by H.R. 5613, with respect to the 
operation of the Medicaid program. . The extent to which the May 2007 
rule would respond to concerns about the transparency of CMS's 
initiative and review standards will depend on how CMS implements it. 

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.[Footnote 7] 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.[Footnote 8] 

CMS 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 
who serve Medicaid beneficiaries. For example, Medicaid payments by law 
must be "consistent with efficiency, economy, and quality 
care,"[Footnote 9] and states must share in Medicaid costs in 
proportions established according to a statutory formula.[Footnote 10] 

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 governments, as long as the state 
itself contributes at least 40 percent.[Footnote 11] 

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.[Footnote 12] This rule would, among other things, limit 
payments to government providers to their cost of providing Medicaid 
services. Congress has imposed a moratorium on this rule until May 25, 
2008.[Footnote 13] 

Concerns about Certain Medicaid Financing Arrangements That Undermine 
Medicaid's Fiscal Integrity Are Long-standing: 

From 1994 through 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, the 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: Excessive payments to state health facilities; 
Description: States made excessive Medicaid payments to state-owned 
health facilities, which subsequently returned these funds to the state 
treasuries; 
Action taken: In 1987, the Health Care Financing Administration (HCFA, 
now called the Centers for Medicare & Medicaid Services or CMS) issued 
regulations that established payment limits specifically for inpatient 
and institutional facilities operated by states. 

Financing arrangement: Provider taxes and donations; 
Description: Revenues from provider-specific taxes on hospitals and 
other providers and from provider "donations" were matched with federal 
funds and paid to the providers. These providers could then return most 
of the federal payment to the states; 
Action taken: The Medicaid Voluntary Contribution and Provider-Specific 
Tax Amendments of 1991 imposed restrictions on provider donations and 
provider taxes. 

Financing arrangement: Excessive disproportionate share hospital (DSH) 
payments; 
Description: DSH payments are meant to compensate those hospitals that 
care for a disproportionate number of low-income patients. Unusually 
large DSH payments were made to certain hospitals, which then returned 
the bulk of the state and federal funds to the state; 
Action taken: The Omnibus Budget Reconciliation Act of 1993 placed 
limits on which hospitals could receive DSH payments and capped the 
amount of DSH payments individual hospitals could receive. 

Financing arrangement: Excessive DSH payments to state mental 
hospitals; 
Description: A large share of DSH payments were paid to state-operated 
psychiatric hospitals, where they were used to pay for services not 
covered by Medicaid or were returned to the state treasuries; 
Action taken: The Balanced Budget Act of 1997 limited the proportion of 
a state's DSH payments that can be paid to institutions for mental 
disease and other mental health facilities. 

Financing arrangement: Upper payment limit (UPL) for local government 
health facilities; 
Description: In an effort to ensure that Medicaid payments are 
reasonable, federal regulations prohibit Medicaid from paying more than 
a reasonable estimate of the amount that would be paid under Medicare 
payment principles for comparable services. This UPL applies to 
payments aggregated across a class of facilities and not for individual 
facilities. As a result of the aggregate 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; 
Action taken: The Medicare, Medicaid, and SCHIP Benefits Improvement 
and Protection Act of 2000 required HCFA to issue a final regulation 
that established a separate aggregate payment limit for local 
government health facilities. HCFA issued its final regulation on 
January 12, 2001. In 2002, CMS issued a regulation that further lowered 
the payment limit for local public hospitals. 

Source: GAO. 

Notes: See GAO, Medicaid: Intergovernmental Transfers Have Facilitated 
State Financing Schemes, GAO-04-574T (Washington, D.C.: Mar. 18, 2004). 
Before June 2001, CMS was known as HCFA. 

[End of table] 

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.[Footnote 14] Because government entities were involved, all or 
a portion of the supplemental payments could be returned to the state 
through an IGT.[Footnote 15] 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 states' misuse of the UPL for certain provider 
payments 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 because of concerns about 
states' use of inappropriate financing arrangements.[Footnote 16] 

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 at least three ways. 

First, inappropriate state financing arrangements effectively increased 
the federal matching rate established under federal law by increasing 
federal expenditures while state contributions remain unchanged or even 
decrease. 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. 
However, after receiving the supplemental payment 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. 

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

This figure is a flowchart showing an example of how one state 
increased federal medicaid matching funds without increased state 
spending. 

[See PDF for image] 

Source: GAO analysis of one state's financing arrangement for state 
fiscal year 2004. 

[End of figure] 

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. However, under these arrangements 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: Michigan; 
Use: 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. 

State: New York; 
Use: 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. 

State: Oregon; 
Use: 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. 

State: Pennsylvania; 
Use: 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 through 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). 

State: Washington; 
Use: 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. 

State: Wisconsin; 
Use: 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. 

Sources: CMS and states, based on work ending in January 2004. 

Note: See GAO, Medicaid: Improved Federal Oversight of State Financing 
Schemes Is Needed, GAO-04-228 (Washington, D.C.: Feb. 13, 2004). 

[End of table] 

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

CMS Oversight Initiative to End State Financing Arrangements Lacked 
Transparency: 

Our March 2007 report[Footnote 17] 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 the 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, economy, and quality of care. 
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 that 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 that 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 and should have done so through 
rule making.[Footnote 18] 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. 

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.[Footnote 19] 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, involved Medicaid payments to government entities and 
categories of claims where federal requirements had been inconsistently 
applied, were evolving, or were not specific. We recommended that CMS 
establish or clarify and communicate its policies in these areas, 
including supplemental payment arrangements.[Footnote 20] CMS's 
responded that clarifying guidance was under development for targeted 
case management, rehabilitation services, and supplemental payment 
arrangements. 

We have ongoing work to examine the amount and distribution of states' 
Medicaid supplemental payments, but have not reported on the May 2007 
rule or other rules related to Medicaid financing issued this year. 
Certain elements of the May 2007 rule relate to the concerns our past 
work has raised. Some aspects of the final rule appear to be responsive 
to recommendations from our past work, to the extent that its 
implementation could help ensure that Medicaid providers, on whose 
behalf states' receive federal matching funds, retain the payments made 
by the state. The extent to which the rule would address concerns about 
the transparency of CMS's initiative and review standards will depend 
on how CMS implements it. 

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 ensures that expenditures benefit those 
low-income people for whom benefits were intended. With annual 
expenditures totaling more than $300 billion per year accountability 
for the significant program expenditures is critical to providing those 
assurances. Ensuring 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. 

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

Contact and Acknowledgments: 

For information regarding this testimony, please contact James Cosgrove 
at (202) 512-7114 or [email protected]. Contact points for our Offices 
of Congressional Relations and Public Affairs may be found on the last 
page of this testimony. Katherine Iritani, Assistant Director; Carolyn 
Yocom, Assistant Director; Ted Burik; Tim Bushfield; Tom Moscovitch; 
and Terry Saiki also made key contributions to this testimony. 

[End of section] 

Related GAO Products: 

Medicaid Financing: Long-Standing Concerns about Inappropriate State 
Arrangements Support Need for Improved Federal Oversight. GAO-08-255T. 
Washington, D.C.: November 1, 2007. 

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

High-Risk Series: An Update. GAO-07-310. Washington, D.C.: January 
2007. 

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

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

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

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

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

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

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

Medicaid in Schools: Improper Payments Demand Improvements in HCFA 
Oversight. GAO/HEHS/OSI-00-69. Washington, D.C.: April 5, 2000. 

Medicaid in Schools: Poor Oversight and Improper Payments Compromise 
Potential Benefit. GAO/T-HEHS/OSI-00-87. Washington, D.C.: April 5, 
2000. 

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

[End of section] 

Footnotes: 

[1] States and the federal government share in Medicaid expenditures. 
The federal share of expenditures for Medicaid services can range from 
50 to 83 percent. 

[2] This figure includes estimated federal and state Medicaid program 
expenditures for provider services and administration in fiscal year 
2006. 

[3] Protecting the Medicaid Safety Net Act of 2008, H.R. 5613, 110th 
Cong. (2008). This legislation would place a moratorium until April 1, 
2009 on seven Medicaid regulations issued by CMS in 2007. 

[4] See 72 Fed. Reg. 29748 (May 29, 2007). 

[5] See related GAO products at the end of this statement. 

[6] Since identifying problems with inappropriate financing 
arrangements involving certain government providers in 1994, we have 
suggested that the Congress consider limiting payments to government 
providers to their costs of providing Medicaid services to Medicaid 
beneficiaries. See GAO, Medicaid: States Use Illusory Approaches to 
Shift Program Costs to Federal Government, GAO/HEHS-94-133 (Washington, 
D.C.: Aug. 1, 1994). 

[7] 42 U.S.C. ï¿½ï¿½ 1396 et seq. (2000). 

[8] Throughout 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. 

[9] See 42 U.S.C ï¿½ 1396a(a)(30)(A) (2000). 

[10] Under the formula, the federal government may pay from 50 to 83 
percent of a state's Medicaid expenditures for services. States with 
lower per capita incomes receive higher federal matching rates. 42 
U.S.C ï¿½ 1396d(b) (2000). 

[11] See 42 U.S.C ï¿½ 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. 

[12] See 72 Fed. Reg. 29,748 (May 29, 2007). 

[13] See Pub. L. No. 110-28, ï¿½ 7002, 121 Stat. 112, 187 (2007). 

[14] The two most common supplemental payments that involved illusory 
payments to government providers are UPL payments and 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 DSH payments. 

[15] State and local governments use IGTs to carry out their shared 
governmental functions, such as collecting and redistributing revenues 
to provide essential government services. 

[16] GAO, High Risk Series: An Update, Major Management Challenges and 
Program Risks: Department of Health and Human Services, GAO-07-310 
(Washington, D.C.: Jan. 2007). 

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

[18] This 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 State 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). 

[19] See 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). 

[20] Other areas where our 2005 report identified that federal law and 
policies had been inconsistently applied, were evolving, or were not 
specific included targeted case management services and rehabilitation 
services. 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 billion, across all states. 

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