    Medicaid Demonstration Waivers: Recent HHS Approvals Continue to
    Raise Cost and Oversight Concerns (31-JAN-08, GAO-08-87).

    Medicaid, a joint federal and state program, finances health care
    for 60 million low-income people. Section 1115 of the Social
    Security Act authorizes the Secretary of Health and Human
    Services to waive certain federal Medicaid requirements and allow
    demonstration projects that are likely to promote Medicaid
    objectives. Under federal policy, states must show that federal
    spending for proposed demonstrations will be no greater than if
    the state's existing Medicaid program were continued. GAO
    examined the extent to which HHS ensured that recent
    comprehensive 1115 demonstrations--affecting a broad range of
    services for beneficiaries statewide--will (1) be budget neutral
    to the federal government and (2) maintain Medicaid's fiscal
    integrity. For demonstrations approved in 2005 (Florida and
    Vermont), GAO obtained information from federal and state
    officials and also relied on past reviews of other
    demonstrations.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-08-87
        ACCNO:   A80342
      TITLE:     Medicaid Demonstration Waivers: Recent HHS Approvals
    Continue to Raise Cost and Oversight Concerns
         DATE:   01/31/2008
      SUBJECT:   Cost control
    	     Cost effectiveness analysis
    	     Evaluation criteria
    	     Federal funds
    	     Federal/state relations
    	     Health care cost control
    	     Health care costs
    	     Health insurance cost control
    	     Medicaid
    	     Program evaluation
    	     Program management
    	     Strategic planning
    	     Waivers

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    GAO-08-87

    This is the accessible text file for GAO report number GAO-08-87
    entitled 'Medicaid Demonstration Waivers: Recent HHS Approvals Continue
    to Raise Cost and Oversight Concerns' which was released on March 3,
    2008.

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    Report to Congressional Requesters:

    United States Government Accountability Office:

    GAO:

    January 2008:

    Medicaid Demonstration Waivers:

    Recent HHS Approvals Continue to Raise Cost and Oversight Concerns:

    Medicaid Demonstration Waivers:

    GAO-08-87:

    GAO Highlights:

    Highlights of GAO-08-87, a report to congressional requesters

    Why GAO Did This Study:

    Medicaid, a joint federal and state program, finances health care for
    60 million low-income people. Section 1115 of the Social Security Act
    authorizes the Secretary of Health and Human Services to waive certain
    federal Medicaid requirements and allow demonstration projects that are
    likely to promote Medicaid objectives. Under federal policy, states
    must show that federal spending for proposed demonstrations will be no
    greater than if the state�s existing Medicaid program were continued.

    GAO examined the extent to which HHS ensured that recent comprehensive
    1115 demonstrations�affecting a broad range of services for
    beneficiaries statewide�will (1) be budget neutral to the federal
    government and (2) maintain Medicaid�s fiscal integrity. For
    demonstrations approved in 2005 (Florida and Vermont), GAO obtained
    information from federal and state officials and also relied on past
    reviews of other demonstrations.

    What GAO Found:

    HHS did not adequately ensure that Florida�s and Vermont�s Medicaid
    demonstrations will be budget neutral to the federal government before
    approving them. HHS approved spending limits that were higher than the
    limits that would have been granted if HHS had held the states to
    limits based on benchmark growth rates, that is, the lower of the
    state�s historical spending growth or nationwide estimates of Medicaid
    growth. Although HHS allows states to deviate from these benchmarks if
    states can show that using them would not provide accurate projections,
    HHS�s basis for approving the higher spending limits was not fully
    supported by documentation. In Florida, HHS approved a $52.6 billion
    spending limit for the 5 year demonstration� $6.9 billion more than the
    documentation supported. In Vermont, HHS approved a $4.7 billion
    spending limit�$246 million higher than supported.

    HHS also did not ensure that the two demonstrations maintain Medicaid�s
    fiscal integrity. In Florida, HHS allowed the state to establish a
    spending limit using a historical spending base that included payments
    HHS had previously identified as problematic. In 2005, an HHS review
    found several problems with the payment arrangement�problems that
    potentially resulted in inflated and inaccurate payments. In Vermont,
    where the state proposed operating a managed care organization, HHS
    agreed to an administrative reimbursement rate higher than what the
    state received prior to the demonstration. Under this arrangement, the
    state can use excess revenues to pay for health-related programs that
    were previously funded by the state and that do not exclusively benefit
    Medicaid beneficiaries, such as a grant to the University of Vermont
    medical school. A July 2007 GAO letter to the Secretary discussed
    concerns about this approval�s consistency with federal law and
    recommended that the Secretary reexamine Vermont�s demonstration and,
    where appropriate, either modify its terms or seek statutory authority
    for it to continue in its current form.

    Concerns about HHS�s demonstration approval process in this report are
    consistent with those GAO has raised in past reviews of other states�
    demonstration proposals. In 2002 and 2004, GAO recommended that HHS
    take steps to strengthen its fiscal oversight of Medicaid by improving
    the Medicaid demonstration review and approval process, in part by (1)
    clarifying criteria for reviewing and approving states� demonstration
    spending limits, (2) better ensuring that valid methods are used to
    demonstrate budget neutrality and (3) documenting and making public
    material explaining the basis for any approvals. HHS has not taken
    action on these recommendations and maintains that its process is
    sufficient. Because HHS continues to disagree with these
    recommendations and with the need to reexamine the Vermont
    demonstration, GAO is elevating these issues to the Congress for
    consideration.

    What GAO Recommends:

    GAO recommends that the Congress consider (1) requiring HHS to improve
    the demonstration review and approval process and (2) addressing HHS�s
    authority to approve demonstrations such as Vermont�s. GAO recommends
    that HHS reexamine Florida�s spending limit. In its comments, HHS
    stated that its process was sufficient. GAO believes that the limit
    allows spending that should not be allowed.

    To view the full product, including the scope and methodology, click on
    [hyperlink, http://www.gao.gov/cgi-bin/getrpt?gao-08-87]. For more information, contact
    Marjorie Kanof at (202) 512-7114 or kanofm@gao.gov.

    [End of section]

    Contents:

    Letter:

    Results in Brief:

    Background:

    HHS Did Not Adequately Ensure the Budget Neutrality of Medicaid
    Demonstrations in Florida and Vermont before Approving Them:

    HHS Has Not Ensured That Demonstrations in Florida and Vermont Maintain
    the Fiscal Integrity of the Medicaid Program:

    Conclusions:

    Matters for Congressional Consideration:

    Recommendation for Executive Action:

    Agency and State Comments and Our Evaluation:

    Appendix I: Scope and Methodology:

    Appendix II: Comments from the Department of Health and Human Services:

    Appendix III: Comments from the State of Florida:

    Appendix IV: Comments from the State of Vermont:

    Appendix V: GAO Contact and Staff Acknowledgments:

    Related GAO Products:

    Tables:

    Table 1: Spending Limit for Florida's Medicaid Demonstration as
    Proposed, Approved, and Calculated under HHS's Benchmark Policy and
    Supported by HHS's Explanations:

    Table 2: Comparison of Florida's Per Person Growth Rates as Proposed
    and Approved under HHS's Benchmark Policy and Supported by HHS's
    Explanations:

    Table 3: Spending Limit for Vermont's Medicaid Demonstration as
    Proposed, Approved, and Calculated under HHS's Benchmark Policy and
    Supported by HHS's Explanations:

    Table 4: Comparison of Vermont's Beneficiary Enrollment Growth Rates as
    Proposed and Approved under HHS's Benchmark Policy and Supported by
    HHS's Explanations:

    Table 5: HHS-Approved Distribution of Florida's Annual Low-Income Pool
    of Federal, State, and Local Funds, Demonstration Year One:

    Table 6: Examples of Vermont's Use of Excess Medicaid Revenues under
    Its Demonstration:

    Figures:

    Figure 1: Overview of Process for Projecting the Future Cost of a
    State's Existing Medicaid Program:

    Figure 2: Vermont Health Access Program Surpluses and Deficits:

    Abbreviations:

    CMS: Centers for Medicare & Medicaid Services:
    HHS: Department of Health and Human Services:
    HIFA: Health Insurance Flexibility and Accountability:
    OMB: Office of Management and Budget:
    PAS: Provider Access System:
    SCHIP: State Children's Health Insurance Program:
    UPL: Upper Payment Limit:

    United States Government Accountability Office:

    Washington, DC 20548:

    January 31, 2008:

    The Honorable Henry A. Waxman:
    Chairman:
    Committee on Oversight and Government Reform:
    House of Representatives:

    The Honorable John D. Dingell:
    Chairman:
    Committee on Energy and Commerce:
    House of Representatives:

    The Honorable Frank J. Pallone, Jr.:
    Chairman:
    Subcommittee on Health:
    Committee on Energy and Commerce:
    House of Representatives:

    The Honorable Sherrod Brown:
    United States Senate:

    Medicaid is a federal-state program that finances health care services
    for about 60 million low-income individuals, including children and
    aged or disabled adults. Established in 1965 under title XIX of the
    Social Security Act, Medicaid consists of more than 50 distinct state-
    based programs that cost the federal government and states an estimated
    $317 billion in fiscal year 2005.[Footnote 1] Each state administers
    its Medicaid program within federal requirements established in statute
    and regulations, and the federal government shares in the cost of each
    state's program by paying an established share of reported
    expenditures.[Footnote 2] Under section 1115 of the Social Security
    Act, however, the Secretary of Health and Human Services may waive
    certain federal requirements for demonstrations that the Secretary
    deems likely to promote Medicaid objectives--allowing states to test
    and evaluate new approaches for delivering Medicaid services.

    In the early 1980s, the Department of Health and Human Services
    (HHS)[Footnote 3] adopted a policy that required states to document
    that their proposed demonstrations would be budget neutral[Footnote 4]
    to the federal government, that is, the federal government will spend
    no more with the demonstrations than without them. Each demonstration
    operates under a negotiated budget neutrality agreement that places
    limits on federal Medicaid spending over the life of the demonstration.
    A spending limit governing a demonstration is based on the projected
    costs of the existing Medicaid program without the demonstration.
    States estimate the cost of continuing their existing Medicaid programs
    by projecting growth in per person costs and beneficiary enrollment
    over the 5-year standard demonstration period. HHS policy guidance
    states that spending limits are based on estimates of growth (growth
    rates) that are the lower of (1) the state's historical growth for
    Medicaid in recent years or (2) Medicaid growth rates projected for the
    nation. These estimates are termed benchmark rates in this
    report.[Footnote 5]

    In 1995, 2002, and 2004, we reported that HHS had not adequately
    ensured that approved Medicaid demonstrations would be budget neutral
    to the federal government.[Footnote 6] The core of our findings
    included that (1) HHS approved spending limits that were based on
    projections of growth that exceeded state-specific and nationwide
    benchmarks, (2) HHS approved spending limits that included costs that
    were impermissible or inappropriate, and (3) the basis for HHS's
    approval of states' demonstration spending limits was unclear and the
    process by which this was done was largely undocumented. We have also
    reported numerous times since the early 1990s about some states'
    financing arrangements that took advantage of the flexibility in the
    Medicaid program to boost the federal support they received for the
    program at little or no cost to states. Under one such financing
    arrangement, for example, states made illusory Medicaid payments to
    certain government-owned providers--payments in excess of standard
    Medicaid reimbursement rates, otherwise known as supplemental payments-
    -to obtain the federal share on the supplemental payments, then
    required providers to return most or all of the payments to the
    state.[Footnote 7] We concluded that such practices undermined the
    fiscal integrity of the program, and HHS in recent years has sought to
    curtail them. Both of these issues--lack of budget neutrality and
    concerns about fiscal integrity--have contributed to our designating
    Medicaid as a high-risk program since 2003.[Footnote 8]

    You expressed interest in the costs of Medicaid section 1115
    demonstrations to the federal government and asked us to examine recent
    demonstration proposals approved by HHS. We selected demonstrations
    based on when they were approved--we selected demonstrations approved
    from July 2004 through December 2006--and whether they were
    comprehensive and accounted for the majority of the state's Medicaid
    expenditures.[Footnote 9] Two section 1115 demonstrations that HHS
    approved--for Florida and Vermont in 2005--met these criteria. Both
    demonstrations involve expanding the use of managed care to deliver
    services to Medicaid beneficiaries: in Florida, by requiring certain
    Medicaid beneficiaries to enroll in competing state-approved managed
    care plans; in Vermont, by creating a single state-run managed care
    organization. We have already reported to you on certain aspects of
    HHS's approval of demonstrations in Florida and Vermont. In July 2007,
    we reported that demonstrations in Florida and Vermont have mixed
    implications for beneficiaries and that opportunities for public input
    to HHS during the approval process were limited.[Footnote 10] Also in a
    July 2007 letter to the Secretary of HHS, we reported concerns about
    the consistency of the Florida and Vermont demonstrations with federal
    law: in Florida, about HHS allowing limits on covered benefits and cost
    sharing in excess of statutory limits without addressing statutory
    restrictions on its authority to do so; in Vermont, about HHS allowing
    the state to operate its own Medicaid managed care organization through
    a contract between two related state agencies and, through this
    arrangement, to apply Medicaid funds to programs previously funded by
    the state.[Footnote 11] This report addresses the extent to which the
    Secretary of HHS ensured, before approving them, that the Florida and
    Vermont demonstrations will (1) be budget neutral to the federal
    government and (2) maintain the fiscal integrity of the Medicaid
    program.

    To determine the extent to which HHS ensured that the demonstrations in
    Florida and Vermont will be budget neutral, we examined each state's
    projection of the combined federal and state spending needed to
    continue its existing Medicaid program. We compared the assumptions
    about cost and beneficiary enrollment growth used to develop the
    demonstration spending limits approved by HHS against our estimates of
    spending limits had HHS's benchmarks been used. We asked officials of
    the state Medicaid agencies, HHS, and the Office of Management and
    Budget (OMB) for explanations and quantitative support for spending
    projections that used growth assumptions exceeding HHS benchmarks and
    estimated the spending limits supported by these explanations and
    documentation.[Footnote 12]

    To determine the extent to which HHS ensured that the two
    demonstrations will maintain the fiscal integrity of the Medicaid
    program, we evaluated HHS's process for reviewing section 1115
    demonstration proposals and whether the demonstrations held potential
    for inappropriately leveraging federal Medicaid funds. We reviewed
    Florida and Vermont demonstration-related materials, including the
    demonstration proposals and supporting documentation, correspondence
    between HHS and the two states, and the special terms and conditions
    that govern implementation, operation, and evaluation of approved
    demonstrations. We also reviewed HHS documentation related to the
    states' Medicaid financing methods and supplemental payment
    arrangements. And we met with state and federal officials, including
    officials from HHS's Office of the Actuary, the Division of Family and
    Children's Health Programs Group (the division within the Centers for
    Medicare & Medicaid Services (CMS) that reviews section 1115
    demonstration proposals), the Division of Reimbursement and State
    Financing (the division within CMS that monitors the appropriateness of
    state financing arrangements), and from OMB. Appendix I more fully
    discusses our scope and methodology. We conducted our work from June
    2006 through January 2008 in accordance with generally accepted
    government auditing standards.

    Results in Brief:

    HHS did not adequately ensure that Florida's and Vermont's Medicaid
    demonstrations will be budget neutral to the federal government before
    approving them. The spending limits that HHS approved for the two
    demonstrations were higher than the limits that would have been granted
    if HHS had held the states to limits based on HHS's benchmark growth
    rates. Although HHS allows states to deviate from these benchmarks if
    states can show that using them would not provide accurate projections,
    HHS's basis for approving the higher spending limits was not fully
    supported by documentation. HHS provided support for part of the
    increase but not for the entire amount.

    * For Florida, HHS approved a 5-year spending limit for the
    demonstration estimated at $52.6 billion,[Footnote 13] an amount $6.9
    billion higher than supported. HHS approved demonstration spending
    limits based on projections of cost growth that exceeded HHS's
    benchmarks of the state's own recent history of Medicaid program growth
    and estimates of Medicaid growth nationwide. Specifically, HHS approved
    cost growth rates for one group of beneficiaries based on a selected
    period of unusually high growth from Florida's historical experience
    and cost growth rates for another group of beneficiaries based on
    unsupported increases to nationwide estimates.

    * For Vermont, HHS approved a 5-year spending limit for the
    demonstration of $4.7 billion, an amount $246 million higher than
    supported. Similar to what it did for Florida, although to a lesser
    degree, HHS approved a spending limit using rates for projecting
    enrollment growth that were higher than the state's historical growth
    and projections of Medicaid growth nationwide and did not fully support
    its reasons. HHS also allowed Vermont to boost its spending limit by
    allowing the state to include projections of spending that were
    "hypothetical" in the state's $4.7 billion spending limit, specifically
    funds that the state could have spent on a previous Medicaid section
    1115 demonstration but did not spend.

    HHS also did not ensure that demonstrations in Florida and Vermont
    maintained the fiscal integrity of the Medicaid program prior to
    approving them.

    * In Florida, HHS allowed the state to use spending from a supplemental
    payment arrangement that the state had in place prior to the
    demonstration as the basis for allowed spending under the
    demonstration. A 2005 HHS financial management review found several
    problems with this earlier arrangement, which involved supplemental
    payments to certain hospitals. The review found that Florida had
    incorrectly calculated the level of supplemental payments for which
    federal Medicaid funds were obtained, potentially resulting in inflated
    and inaccurate payments. Without correcting these problems, HHS allowed
    Florida to use the spending under the prior hospital supplemental
    payment arrangement as the basis for the spending allowed under the
    demonstration. To address problems with inaccurate methods and data for
    calculating allowable supplemental payment amounts used by other
    states, we had, in 2004, recommended that HHS establish appropriate
    methods for states' calculations of supplemental payments, but HHS has
    not implemented this recommendation for any state.

    * In Vermont, HHS allowed the state to operate its own managed care
    organization and to claim federal matching funds for payments to the
    organization, and agreed to reimburse Vermont for the administration of
    its public managed care organization at a rate higher than that
    typically paid to state Medicaid agencies. Specifically, the financing
    arrangement allows the state to pay its managed care organization for
    administrative costs at a rate that--although typical for private
    managed care organizations--is higher than the rate paid to Vermont
    before the demonstration and that of most state Medicaid agencies.
    Under this arrangement, HHS allowed the state to retain excess
    revenues[Footnote 14] and use these funds to support health-related
    programs that were previously funded by the state and that do not
    exclusively benefit Medicaid beneficiaries, such as a grant to the
    University of Vermont medical school. In July 2007, we raised concerns
    about this approval's consistency with federal law.[Footnote 15] In
    particular, the approval of the Vermont demonstration raised the
    question whether the Vermont Medicaid agency could enter into a managed
    care contract with one of its own offices and receive federal matching
    funds for lump-sum payments to that office rather than for payments
    based on actual costs.

    The findings in this report are consistent with certain findings in our
    earlier reports and indicate that action is still needed to ensure the
    transparency of added costs to the federal government associated with
    section 1115 demonstrations and to maintain Medicaid's fiscal
    integrity. HHS has not addressed long-standing concerns with the
    demonstration approval process, including the validity of its methods
    for determining budget neutrality, the basis for its approval of
    states' spending limits, and the transparency of the review process.
    Further, HHS continues to maintain that its approval of Vermont's
    demonstration is consistent with federal law, but has not addressed the
    concerns raised in our July 2007 letter. Consequently, this report
    includes two matters for congressional consideration:

    * The Congress should consider requiring increased attention to fiscal
    responsibility in the approval of section 1115 Medicaid demonstrations
    by requiring the Secretary of HHS to improve the demonstration review
    process through steps such as (1) clarifying criteria for reviewing and
    approving states' proposed spending limits, (2) ensuring that valid
    methods are used to demonstrate budget neutrality, and (3) documenting
    the basis for any approvals.

    * The Congress should consider addressing whether demonstrations that
    allow states to operate public managed care organizations and retain
    excess revenue to support programs previously funded by the state--
    including the Vermont demonstration--are within the scope of the
    Secretary of HHS's authority under section 1115 of the Social Security
    Act.

    In this report we are also recommending that the Secretary of HHS
    calculate the level of supplemental payments for which Florida could
    have obtained federal Medicaid funds in the absence of the proposed
    demonstration, using appropriate methods and accurate data sources, and
    adjust Florida's spending limit accordingly.

    In commenting on a draft of this report, HHS strongly disagreed with
    our findings, conclusions, and recommendation. HHS commented that the
    draft report did not accurately characterize the demonstration programs
    or HHS's budget neutrality policies. HHS also noted that the draft did
    not adequately account for the likelihood of differences in
    professional interpretation of quantifiable analyses or adequately
    acknowledge HHS's efforts to ensure Medicaid compliance and fiscal
    integrity. HHS emphasized that the demonstrations are approved at the
    discretion of the Secretary of HHS and that HHS's review of
    demonstration proposals includes both budgetary and programmatic
    elements. With regard to HHS's approval of the Vermont demonstration,
    HHS disagreed with our concerns and earlier recommendation to reexamine
    the demonstration and, where appropriate, either modify the
    demonstration's terms or seek statutory authority for it to continue in
    its current form. HHS maintained that issues of legal authority were
    adequately and appropriately addressed in the information provided to
    us during the course of our fieldwork.

    We believe our findings, conclusions, and recommendation remain valid.
    Our characterizations of the programs and policies were based on
    documentation obtained from HHS and states and discussions with federal
    and state officials, and we believe we have captured them accurately.
    We acknowledge that the Secretary has some discretion when approving
    section 1115 demonstrations. As noted in this report, budget neutrality
    is a long-standing HHS policy, but is not required by law. We maintain,
    however, that to provide accountability and transparency in federal
    spending for the Medicaid program, the Secretary's approvals should be
    based on clearly articulated policies and spending limits that are
    consistent with these policies. Whenever HHS's decisions and spending
    estimates met these tests, we accepted them. We did not, however,
    accept estimates when program officials could not document or clearly
    articulate the reasoning they had used, demonstrate how this reasoning
    was consistent with budget neutrality and fiscal integrity principles,
    and explain how the resulting spending limits were derived. Because our
    findings in Florida and Vermont are consistent with findings from our
    earlier work, we believe that actions to improve the demonstration
    approval process--including the criteria used, the methods allowed to
    determine budget neutrality, and the documentation to support the final
    approved limits--are needed. Given HHS's opposition to taking
    recommended actions, we believe that elevating certain long-standing
    recommendations for congressional consideration is a necessary step.

    We also provided a draft of this report to Florida and Vermont. Florida
    stated that during the negotiations of the demonstration proposal,
    state officials worked closely with HHS to ensure that all data and
    documentation were provided in a timely and accurate manner to support
    the proposal. Vermont indicated that the state had assumed an
    unprecedented amount of risk related to program expenditures in
    exchange for the flexibility granted by the Secretary and that state
    and federal staff had engaged in extensive discussion and analysis of
    Vermont's historical expenditures, cost and caseload trends, and
    program policies in arriving at the final spending limit. On the basis
    of our review of available documentation, we agree that the states
    provided data and documentation to HHS supporting their demonstration
    proposals. Our concern remains, however, with the lack of
    documentation--from the states or HHS--showing how the final spending
    limits were derived, particularly since they were based on assumptions
    about cost and enrollment growth that were higher than HHS's
    benchmarks. In addition, our legal concerns about the Vermont
    demonstration remain. Consequently, we have elevated this matter to the
    Congress for consideration.

    Background:

    Medicaid is one of the largest programs in federal and state budgets.
    In fiscal year 2005, Medicaid expenditures totaled an estimated $317
    billion. States pay qualified health providers for a broad range of
    covered services provided to eligible beneficiaries. The federal
    government reimburses states for a share of these expenditures. The
    federal matching share of each state's Medicaid expenditures for
    services is determined by a formula defined under federal law and can
    range from 50 to 83 percent.[Footnote 16]

    Each state administers its Medicaid program in accordance with a state
    Medicaid plan that must be approved by HHS.[Footnote 17] Traditional
    Medicaid programs represent an open-ended entitlement, meaning the
    state will enroll all eligible individuals who apply for Medicaid, and
    both the state and federal government will pay their shares of
    expenditures for individuals covered under a state's approved Medicaid
    plan. States have considerable flexibility in designing their Medicaid
    programs, but under federal Medicaid law, states generally must meet
    certain requirements for what benefits are provided and who is eligible
    for the program.

    Medicaid demonstrations provide a way for states to innovate outside of
    many of Medicaid's usual requirements. Under section 1115 of the Social
    Security Act, the Secretary has authority to waive certain federal
    Medicaid requirements and authorize otherwise unallowable expenditures
    for "experimental, pilot, or demonstration projects" that are likely to
    promote Medicaid objectives.[Footnote 18] States have used the
    flexibility granted through section 1115 to implement major changes to
    existing state Medicaid programs. For example, some states used
    Medicaid section 1115 demonstrations in the 1980s and 1990s to
    introduce mandatory managed care for their Medicaid beneficiaries.

    Since the early 1980s, HHS has required that states show that their
    proposed section 1115 demonstrations will be budget neutral to the
    federal government--that is, federal expenditures under a state's
    demonstration will not be greater than if the state had continued its
    existing Medicaid program. HHS requires states to show that proposed
    demonstrations are budget neutral by preparing 5-year projections of
    spending (1) under the current Medicaid program and (2) under the
    proposed demonstration. HHS policy states that for a demonstration to
    be considered budget neutral, the federal share of projected Medicaid
    expenditures under the demonstration can be no greater than the federal
    share of projected Medicaid expenditures based on continuing the
    existing Medicaid program.

    Budget Neutrality Is Based on the Projected Cost of the Existing
    Medicaid Program:

    Because HHS bases spending limits for proposed demonstrations on the
    projected cost of continuing an existing Medicaid program, a state has
    an incentive to maximize its projected costs. HHS policy states that
    the federal share of spending on demonstrations will be limited by
    spending limits calculated from two components:

    * Spending base. States select a recently completed fiscal year that
    establishes base levels of funding for services and programs affected
    by the proposed demonstration--a state's "spending base." States also
    identify beneficiary groups for inclusion in the proposed
    demonstration. These beneficiary groups can, at the Secretary's
    discretion, include individuals enrolled in other demonstrations a
    state may be operating and beneficiaries from the State Children's
    Health Insurance Program (SCHIP), which provides health coverage to
    children in families whose incomes, while low, are above Medicaid's
    eligibility requirements.[Footnote 19]

    * Growth rates. States should submit to HHS 5 years of historical data
    for per person costs and beneficiary enrollment in their existing
    Medicaid programs, including quantified explanations for anomalies in
    their historical trends. HHS policy says that spending limits should be
    based on growth rates that are the lower of state-specific history or
    estimates of nationwide growth for the beneficiary groups included in
    the demonstration (referred to in this report as benchmark growth
    rates). HHS's guidance is specific to per person cost growth rates and
    does not explicitly address the application of enrollment growth rates;
    however, HHS refers to state historical and nationwide enrollment
    growth rates in considering the spending limits. Nationwide estimates
    of cost and beneficiary enrollment growth are developed by CMS
    actuaries to assist OMB in preparing the President's Budget.

    To project the costs of continuing a state's existing Medicaid program,
    HHS policy calls for applying the benchmark growth rates to the state's
    spending base over a 5-year period to establish total projected costs
    absent the demonstration.[Footnote 20] HHS sets spending limits for
    proposed demonstrations based in part on these total projected costs
    (see fig. 1).

    Figure 1: Overview of Process for Projecting the Future Cost of a
    State's Existing Medicaid Program:

    This figure is a flowchart showing an overview of process for
    projecting the future cost of a state's existing medicaid program.

    [See PDF for image]

    Source: GAO analysis of HHS information.

    [A] A state may propose, for example, that certain groups of
    beneficiaries, such as aged and disabled beneficiaries, will operate
    under the terms of the state's approved state Medicaid plan rather than
    under the terms of the demonstration. In the Florida and Vermont
    demonstrations, major Medicaid beneficiary groups--aged, blind, and
    disabled beneficiaries and families and children--were included in the
    demonstrations.

    [End of figure]

    HHS allows states to use higher-than-benchmark growth rates if they can
    establish that historical or nationwide data do not accurately depict
    anticipated growth in the state Medicaid program. HHS considers
    spending limits to be a product of negotiations that are informed by
    HHS's policy to consider the state's historical experience and
    projections of growth in the President's Budget. In addition, HHS's
    policy indicates that states, in providing HHS with state-specific
    historical growth rates, must quantify any anomalies in the trends.

    Recent Demonstrations Approved in Florida and Vermont Allow Significant
    Changes in How These States Operate Their Medicaid Programs:

    Recently approved section 1115 Medicaid demonstrations in Florida and
    Vermont significantly change the operation of the two states' Medicaid
    programs. Both demonstrations expand the use of managed care by
    requiring most Medicaid beneficiaries to enroll in managed care
    plans:[Footnote 21] Florida through state contracts with multiple
    managed care plans to provide services and Vermont by creating a single
    managed care organization operated by an office within the state
    Medicaid agency.[Footnote 22]

    Florida: Approved by HHS in October 2005 and launched in July 2006,
    Florida's demonstration is designed to give Medicaid beneficiaries
    different options for health care plans and benefits through increased
    use of managed care plans to provide Medicaid coverage to
    beneficiaries, in a competitive environment.[Footnote 23] In the
    initial phase of the demonstration, certain Medicaid beneficiaries in
    two counties are required to enroll in state-approved managed care
    plans. Managed care plans compete for Medicaid beneficiaries by
    offering different coverage options, including customized benefits and
    cost sharing, subject to certain limitations. Unlike many other
    previous Medicaid managed care systems, managed care plans in Florida
    have the authority to design benefit packages subject to approval by
    the state. Initially implemented in a two-county area, the managed care
    components of the demonstration are planned for statewide
    implementation by June 2010.[Footnote 24] Another key component of
    Florida's demonstration was the establishment of a pool of funds to
    finance supplemental payments--payments above the state's usual payment
    rate--to certain types of Florida health care providers. Known as the
    low-income pool, this component of the demonstration was designed in
    part to continue funding for a supplemental payment program for
    hospitals that the state had in place prior to the demonstration.
    Payments from the $5 billion low-income pool ($1 billion annually) are
    authorized for selected Medicaid providers statewide to help offset the
    cost of providing care to Medicaid beneficiaries and underinsured and
    uninsured individuals.[Footnote 25]

    Vermont: Approved by HHS in September 2005 and launched the following
    month, Vermont's demonstration is designed to contain costs and, by
    potentially delivering services to Medicaid beneficiaries for less and
    reinvesting excess revenue, to allow the state to serve more of its
    uninsured population. Under the demonstration, Vermont created a
    single, state-operated managed care organization to cover virtually all
    of the state's Medicaid population.[Footnote 26] HHS approved a managed
    care arrangement whereby the state Medicaid agency contracts with one
    of its own components (the Office of Vermont Health Access) to operate
    as a managed care organization.[Footnote 27] The Office of Vermont
    Health Access receives monthly actuarially certified lump-sum payments
    from the state Medicaid agency, which in turn receives the federal
    share of these lump-sum payments. The monthly payment is intended to
    cover the medical costs and administrative expenses of serving enrolled
    beneficiaries. Vermont also received authority to retain "savings,"
    that is, any excess revenue generated by the state managed care
    organization, and apply them to programs that meet certain agreed-upon
    health objectives, such as increasing health insurance
    coverage.[Footnote 28]

    Concerns about Budget Neutrality of Medicaid Demonstrations and Certain
    Excessive Supplemental Payments Are Long-standing:

    On several occasions since the mid-1990s, we have reported concerns
    that HHS had approved Medicaid demonstrations that were not budget
    neutral to the federal government.

    * In 1995 we reported that HHS applied new, more flexible budget
    neutrality guidance allowing three states to consider "new
    methodologies" for determining budget neutrality of proposed
    demonstrations. Based in part on these new methodologies, HHS had
    approved spending limits for these demonstrations that were not budget
    neutral and could increase federal Medicaid expenditures.[Footnote 29]

    * In 2002, we reported that HHS approved spending limits for
    demonstrations that were not budget neutral to the federal government
    by allowing two states to include inappropriate or impermissible costs
    in their spending projections. We recommended that HHS ensure that
    valid methods are used to demonstrate budget neutrality by developing
    and implementing consistent criteria for reviewing and approving
    states' budget neutrality analyses. HHS disagreed with the
    recommendation, stating that its methods were valid.[Footnote 30]

    * In 2004, we reported that HHS approved spending limits for section
    1115 demonstrations in four states that were not budget neutral to the
    federal government. These states projected the costs of their Medicaid
    programs at rates of growth exceeding state-specific and nationwide
    benchmarks for Medicaid cost and enrollment growth without documenting
    the rationale for the higher growth rates. We recommended that HHS (1)
    clarify criteria for reviewing and approving spending limits of states'
    proposed demonstrations and (2) reconsider the spending limits of
    recently approved demonstrations. We also recommended that HHS document
    and make public the basis for any section 1115 demonstration approvals,
    including the basis for cost and enrollment growth rates used to set
    spending limits, and ensure that states comply with reporting and
    evaluation requirements.[Footnote 31] HHS concurred with our
    recommendations to make public the basis for its approvals, but did not
    concur with our recommendations on clarifying approval criteria and
    reconsidering recently approved demonstrations using these
    criteria.[Footnote 32]

    Our past work also includes reports addressing concerns with aspects of
    HHS's oversight of certain state supplemental payment arrangements that
    threatened the fiscal integrity of Medicaid's federal-state
    partnership. States, with HHS approval, can make supplemental Medicaid
    payments--payments above the state's usual Medicaid payment rates for
    certain services, such as nursing home care--and they often do so for
    appropriate reasons. For example, states may make supplemental Medicaid
    payments to certain safety net providers that serve a large share of
    high-cost Medicaid beneficiaries. However, our work since the early
    1990s examining some of these arrangements found that many states were,
    in essence, finding ways through the arrangements to inappropriately
    increase the federal share of Medicaid spending at little or no cost to
    the state.[Footnote 33] In February 2004, for example, we reported that
    states were taking advantage of Medicaid upper payment limit (UPL)
    provisions, resulting in excess federal payments. The UPL is the upper
    bound on what the federal government will pay as its share of Medicaid
    costs for different classes of covered services, and this limit often
    exceeds what states actually pay providers for services.[Footnote 34]
    This difference creates a "gap" between what states typically pay for
    services and the UPL. Some states took advantage of this gap between
    their usual payment rates and what Medicaid could pay under the UPL by
    making large supplemental payments to government providers, acquiring a
    federal share of those payments, and subsequently requiring the
    providers to return most or all of the supplemental payments to the
    state. These states have collected billions of excessive federal
    dollars in past years and often used these returned payments and the
    accompanying federal funds to finance their own share of the Medicaid
    program. We have reported on, and HHS has attempted to curb, such
    recycling of federal Medicaid funds.

    HHS Did Not Adequately Ensure the Budget Neutrality of Medicaid
    Demonstrations in Florida and Vermont before Approving Them:

    HHS approved 5-year demonstration spending limits for Florida and
    Vermont based on projections of cost and beneficiary enrollment growth
    rates that exceeded HHS's own benchmarks--that is, the lower of the
    state's recent historical experience or estimates of Medicaid growth
    nationwide--without adequate support for these deviations. For each
    state, HHS provided support for some, but not all, of the increase
    above these benchmark levels. For Florida, the unsupported difference
    totals about $6.9 billion of the $52.6 billion in projected spending
    over the 5-year demonstration. For Vermont, the unsupported difference
    totals about $246 million over its 5-year demonstration. HHS approved
    higher-than-benchmark growth rates in calculating spending limits for
    the demonstrations and, in the case of Vermont, allowed the state to
    include hypothetical projected expenses inappropriately. In particular,
    HHS allowed Vermont to include projected costs in its spending limit
    based on costs that had been budgeted for and allowed under a previous
    1115 demonstration but that had not been spent. Although HHS provided
    some documentation to justify the deviations from its benchmarks that
    it approved, HHS did not justify all the deviations. In some cases, HHS
    officials told us that the higher growth rates were the results of
    negotiations. However, such negotiations were not always fully
    documented.

    Spending Limit for Florida's Demonstration Not Fully Supported:

    HHS approved a spending limit for Florida's demonstration that exceeded
    the amount HHS could have approved under its benchmark policy, but did
    not fully support the additional spending. Florida's spending limit has
    two primary components, beneficiary services and supplemental payments
    to safety net hospitals. Beneficiary services account for the bulk of
    Medicaid spending and include the medical costs of demonstration
    enrollees. For beneficiary services, HHS established annual per person
    limits on federal funds for medical services to groups of
    beneficiaries.[Footnote 35] Projected over the 5 years of the
    demonstration, these per person limits would result in estimated
    Medicaid spending of about $47.6 billion. However, under HHS's
    benchmark policy of limiting projected growth to the lower of a state's
    recent historical experience or nationwide estimates of Medicaid
    growth, the maximum spending allowed would have been a projected $38.6
    billion, or about $9 billion less. HHS supported deviations from its
    benchmarks that would allow spending projected at an estimated $40.7
    billion--$2.1 billion above the level the benchmarks would have
    allowed, but still $6.9 billion less than what it approved.

    Table 1 shows the spending limit originally proposed by Florida and
    agreed to by HHS. It also shows the spending limit that would have
    resulted using the benchmark growth rates of the lower of the state's
    historical growth or the growth projected in the President's Budget, as
    well as the estimated spending limit that HHS and state officials
    supported through explanations and documentation.

    Table 1: Spending Limit for Florida's Medicaid Demonstration as
    Proposed, Approved, and Calculated under HHS's Benchmark Policy and
    Supported by HHS's Explanations:

    Beneficiary services[A];
    Spending limit as proposed and approved: Proposed by Florida: $47.1;
    Spending limit as proposed and approved: Approved by HHS: $47.6;
    GAO estimate of spending limit calculated using HHS benchmarks and as
    supported by HHS explanations: Spending limit using HHS benchmarks:
    $38.6;
    GAO estimate of spending limit calculated using HHS benchmarks and as
    supported by HHS explanations: Spending limit supported by HHS
    explanations: $40.7.

    Supplemental payments;
    Spending limit as proposed and approved: Proposed by Florida: 5.9;
    Spending limit as proposed and approved: Approved by HHS: 5.0;
    GAO estimate of spending limit calculated using HHS benchmarks and as
    supported by HHS explanations: Spending limit using HHS benchmarks:
    5.0[B];
    GAO estimate of spending limit calculated using HHS benchmarks and as
    supported by HHS explanations: Spending limit supported by HHS
    explanations: 5.0.

    Total;
    Spending limit as proposed and approved: Proposed by Florida: $53.0;
    Spending limit as proposed and approved: Approved by HHS: $52.6;
    GAO estimate of spending limit calculated using HHS benchmarks and as
    supported by HHS explanations: Spending limit using HHS benchmarks:
    $43.6;
    GAO estimate of spending limit calculated using HHS benchmarks and as
    supported by HHS explanations: Spending limit supported by HHS
    explanations: $45.7.

    Source: GAO analysis of data from HHS and Florida.

    [A] Amounts are based on applying annual per person allowed spending to
    expected Medicaid enrollment for two different eligibility groups: (1)
    aged, blind, and disabled beneficiaries and (2) families and children.
    Amounts are for total federal and state spending. The federal
    government matched Florida expenditures at a rate of 58.76 percent in
    2007.

    [B] HHS budget neutrality policy does not establish benchmarks for
    estimating growth of supplemental payment arrangements such as the one
    Florida proposed for its demonstration. The $5.0 billion projected
    amount for supplemental payments that HHS approved is consistent with
    the projected amount using the state's reported growth. A further
    discussion of the basis for HHS's approval of this amount is found in
    the next section of this report.

    [End of table]

    A further discussion of HHS's explanations of its approvals follows.

    Higher Spending Limit in Florida Is Based on Assumptions of Cost Growth
    That Exceed Benchmarks:

    Projected spending on medical services to beneficiary groups in Florida
    is based on assumptions of per person cost and beneficiary enrollment
    growth rates for two primary groups of Medicaid beneficiaries: (1) the
    aged, blind, and disabled and (2) children and families. Florida
    submitted to HHS 5 years of historical data and calculations of cost
    growth rates over this period for the two groups. HHS, in turn,
    compared Florida's state-specific history to estimates of Medicaid
    growth for these beneficiary groups nationwide. However, neither
    Florida's proposed nor HHS's approved spending limit is based on
    projected spending using the lower of the state-specific or nationwide
    benchmarks consistent with HHS policy. Instead, according to HHS and
    state officials, Florida proposed--and HHS approved--higher per person
    cost growth based on adjustments to the growth rates that were made
    during negotiations between HHS and state officials that were not
    documented.

    The cost growth rates HHS accepted in negotiations were substantially
    above those that would have been allowed under HHS's benchmark
    policy.[Footnote 36] As table 2 shows, HHS approved cost growth rates
    of 8 percent for both aged, blind, and disabled beneficiaries, and for
    families and children--lower than Florida was proposing for the first
    group, and slightly higher than Florida was proposing for the second
    group.[Footnote 37] Under HHS's benchmark policy, which calls for
    basing spending limits on projections of growth at the lower of state-
    specific history or estimates of Medicaid growth nationwide, the
    approved cost growth rates would have been 4.80 percent for aged,
    blind, and disabled beneficiaries and 3.11 percent for children and
    families.

    Table 2: Comparison of Florida's Per Person Growth Rates as Proposed
    and Approved under HHS's Benchmark Policy and Supported by HHS's
    Explanations:

    Rates in percentages.

    Rates in percentages: Aged, blind, and disabled;
    Cost growth rates as proposed and approved: Proposed by Florida: 8.73;
    Cost growth rates as proposed and approved: Approved by HHS: 8.00;
    HHS benchmark rates and rates supported by explanations: HHS
    benchmark[A]: 4.80 (N);
    HHS benchmark rates and rates supported by explanations: Rate as
    supported by HHS explanations: 6.45.

    Children and families;
    Cost growth rates as roposed and approved: Proposed by Florida: 7.96;
    Cost growth rates as proposed and approved: Approved by HHS: 8.00;
    HHS benchmark rates and rates supported by explanations: HHS
    benchmark[A]: 3.11 (S);
    HHS benchmark rates and rates supported by explanations: Rate as
    supported by HHS explanations: 3.77.

    Source: GAO analysis of data from HHS and Florida.

    [A] Lower of state historical spending (S) or estimates of Medicaid
    growth nationwide (N).

    [End of table]

    Part, but Not All, of Increase above HHS's Benchmarks Supported:

    HHS officials allow states to use higher cost growth rates if state
    officials can establish that state-specific or nationwide data do not
    accurately depict expected growth in the state Medicaid program. HHS's
    policy indicates that states are to provide quantified explanations of
    growth rate anomalies. For the Florida demonstration, HHS officials
    explained and provided public or internal documents to support part,
    but not all, of the increases to benchmark cost growth rates that HHS
    approved.

    1. For aged, blind, and disabled beneficiaries, HHS allowed adjustments
    to nationwide estimates of cost growth to account for effects of the
    Medicare prescription drug benefit, but quantified explanations for
    only part of the approved increase. HHS officials explained that the
    implementation of the Medicare Part D prescription drug benefit, which
    would have the effect of shifting the cost of many prescription drugs
    out of the Medicaid program and into Medicare, caused a sharp decrease
    in estimated costs for aged, blind, and disabled Medicaid beneficiaries
    nationwide in 2006. This decrease in the cost growth rate for that
    unusual year lowered the nationwide benchmark growth rate for these
    beneficiaries. HHS officials adjusted for the effects of the Medicare
    prescription drug benefit by removing drug-related expenditures from
    the nationwide estimates over the time period under review and
    recalculating estimated nationwide cost growth. As a result of these
    adjustments, HHS provided quantified explanations to the deviation from
    its benchmark and supported projected cost growth of 6.45 percent for
    aged, blind, and disabled beneficiaries--higher than the 4.80 percent
    allowed under its benchmark policy. HHS officials indicated that the
    remaining deviation from the benchmark was attributable to adjustments
    they made to the growth rate to account for an expected increase in
    enrollment of low-cost beneficiaries.[Footnote 38] HHS officials,
    however, did not identify and correct anomalies in the nationwide
    enrollment data to support the additional increase in cost growth from
    6.45 percent to the 8 percent HHS approved for the demonstration.

    2. For families and children, HHS claimed that higher growth over a
    selected time period more accurately reflected cost growth. According
    to HHS's guidance, state-specific growth rates are based on 5 years of
    historical data.[Footnote 39] HHS, however, allowed Florida to
    calculate a cost growth rate for its families and children based on
    data from a truncated period of higher growth of 3 years and 9 months.
    Cost growth over this shortened period of time was 5.88 percent, as
    compared to cost growth of 3.11 percent when using data from the full 5
    years leading up to Florida's base year. HHS officials explained that
    they allowed Florida to selectively use the higher years of data to
    calculate its growth rates for two reasons: (1) that the shortened time
    period replaced earlier years of unusually low cost growth with more
    recent data and (2) that HHS had recently approved a higher cost growth
    rate for a subset of this particular beneficiary group in renewing an
    ongoing Medicaid managed care demonstration. HHS officials did not,
    however, identify and correct an anomaly in the state's earlier data,
    nor did HHS document and explain why the state was allowed to establish
    its spending limits using growth rates that were based on anticipated
    higher growth under the demonstration. In particular, the state, in its
    application, stated that it anticipated higher cost growth under the
    demonstration due to greater use of managed care by Medicaid children
    and families. A review of Florida's historical cost growth that
    includes more recent data cited by HHS officials, and that uses data
    from a 5-year period as indicated by HHS policy, supports a cost growth
    rate of 3.77 percent.

    HHS officials maintained that HHS's methods for ensuring budget
    neutrality are valid and indicated that the department's budget
    neutrality decisions are, to some extent, the product of negotiations.
    HHS officials also said that HHS can assign growth rates that vary from
    the results of analysis of historical data and the President's Budget
    projections if officials are convinced that the trends are merited.

    Spending Limit for Vermont's Demonstration Also Not Fully Supported:

    To a lesser degree than Florida, HHS approved a spending limit for
    Vermont's demonstration based on assumptions of beneficiary enrollment
    growth that exceeded HHS's benchmarks. HHS approved a spending limit of
    $4.7 billion for Vermont's 5-year demonstration. This spending limit,
    however, is $180 million above the maximum supported by HHS and the
    state in explanations and documentation. HHS also allowed Vermont to
    include in its spending limit funds that were "hypothetical," that is,
    $67 million in funds that had been approved as budget neutral for a
    prior section 1115 demonstration but that the state had not actually
    spent.

    Table 3 shows the spending limit as originally proposed by Vermont and
    as agreed to by HHS. It also shows the limit that would apply if HHS
    benchmarks had been used and the limit that HHS and state officials
    explained and supported in documentation. Although HHS reduced
    Vermont's proposed spending limit by over $1.4 billion, this reduction
    resulted from an agreement that the state not include the financing of
    three major programs in the demonstration. These three programs that
    were removed from the state's initial proposal--a long-term care
    demonstration, payments to hospitals under the Disproportionate Share
    Hospital program, and SCHIP--account for most of the $1.4 billion and
    will continue to be operated and reimbursed apart from the Vermont
    demonstration, thus having no affect on the budget neutrality of the
    demonstration.[Footnote 40]

    Table 3: Spending Limit for Vermont's Medicaid Demonstration as
    Proposed, Approved, and Calculated under HHS's Benchmark Policy and
    Supported by HHS's Explanations:

    Dollars in billions.

    Beneficiary services[A];
    Spending limit as proposed and approved: Proposed by Vermont: $6.0[B];
    Spending limit as proposed and approved: Approved by HHS: $4.2;
    GAO estimate of spending limit calculated using HHS benchmarks and as
    supported by HHS explanations: Spending limit using HHS benchmarks:
    $3.9;
    GAO estimate of spending limit calculated using HHS benchmarks and as
    supported by HHS explanations: Spending limit supported by HHS
    explanations: $4.0.

    Other programs;
    Spending limit as proposed and approved: Proposed by Vermont: 0.2[C];
    Spending limit as proposed and approved: Approved by HHS: 0.5[D];
    GAO estimate of spending limit calculated using HHS benchmarks and as
    supported by HHS explanations: Spending limit using HHS benchmarks:
    0.5[E];
    GAO estimate of spending limit calculated using HHS benchmarks and as
    supported by HHS explanations: Spending limit supported by HHS
    explanations: 0.5.

    Total;
    Spending limit as proposed and approved: Proposed by Vermont: $6.2;
    Spending limit as proposed and approved: Approved by HHS: $4.7[F];
    GAO estimate of spending limit calculated using HHS benchmarks and as
    supported by HHS explanations: Spending limit using HHS benchmarks:
    $4.4;
    GAO estimate of spending limit calculated using HHS benchmarks and as
    supported by HHS explanations: Spending limit supported by HHS
    explanations: $4.5.

    Source: GAO analysis of data from HHS and Vermont.

    [A] Amounts for beneficiary services as approved were based on
    projecting cost and enrollment growth for four different eligibility
    groups: (1) aged, blind, and disabled beneficiaries; (2) children and
    families; (3) optional populations from an ongoing section 1115
    demonstration; and (4) beneficiaries from a separate developmental
    services demonstration. Amounts are for total federal and state
    spending. The federal government matched Vermont expenditures at a rate
    of 58.93 percent for fiscal year 2007.

    [B] Includes Vermont's SCHIP ($21 million) and costs associated with
    beneficiaries in a long-term care demonstration ($1.2 billion).

    [C] Disproportionate Share Hospital payments ($183 million).

    [D] Includes costs to administer Medicaid programs ($405 million),
    unspent funds from an ongoing demonstration ($67 million), and funds to
    replace the services of the Vermont State Hospital ($54 million).

    [E] HHS's budget neutrality policy does not establish benchmarks for
    estimating growth of administrative costs, for carrying forward
    surpluses from one demonstration to another, or for funding replacement
    services for state hospitals.

    [F] The $1.4 billion in projected costs for SCHIP, disproportionate
    share hospital payments, and a long-term care demonstration was omitted
    from the original proposal, but Vermont will continue to receive
    federal funding for these programs independent of the demonstration.

    [End of table]

    Higher Spending Limits in Vermont Are Based in Part on Assumptions
    about Beneficiary Enrollment Growth That Exceeded Benchmarks:

    Vermont submitted 5 years of historical cost and beneficiary enrollment
    data for assessment by HHS.[Footnote 41] For per person costs, HHS
    required Vermont to hold growth rates in line with the department's
    benchmark policy. For beneficiary enrollment, however, HHS approved
    growth rates that were higher than benchmark levels. For example, the
    benchmark rate for enrollment growth of aged, blind, and disabled
    beneficiaries was 1.52 percent per year; HHS approved a rate of 2.52
    percent. For the largest group of beneficiaries under the
    demonstration--families and children--HHS approved an enrollment growth
    rate of 1.99 percent, higher than the 1.05 percent nationwide benchmark
    for this group (see table 4).

    Table 4: Comparison of Vermont's Beneficiary Enrollment Growth Rates as
    Proposed and Approved under HHS's Benchmark Policy and Supported by
    HHS's Explanations:

    Rates in percentages.

    Aged, blind, and disabled beneficiaries[B];
    Enrollment growth rates as proposed and approved: Proposed by Vermont:
    2.52;
    Enrollment growth rates as proposed and approved: Approved by HHS:
    2.52;
    HHS benchmark rates and rates as supported by explanations: HHS
    benchmark[A]: 1.52 (S);
    HHS benchmark rates and rates as supported by explanations: Rate as
    supported by HHS explanations: 1.52.

    Children and families;
    Enrollment growth rates as proposed and approved: Proposed by Vermont:
    1.99;
    Enrollment growth rates as proposed and approved: Approved by HHS:
    1.99;
    HHS benchmark rates and rates as supported by explanations: HHS
    benchmark[A]: 1.05 (N);
    HHS benchmark rates and rates as supported by explanations: Rate as
    supported by HHS explanations: 1.05.

    Certain populations from an ongoing section 1115 demonstration;
    Enrollment growth rates as proposed and approved: Proposed by Vermont:
    6.43;
    Enrollment growth rates as proposed and approved: Approved by HHS:
    6.43;
    HHS benchmark rates and rates as supported by explanations: HHS
    benchmark[A]: 1.10 (N);
    HHS benchmark rates and rates as supported by explanations: Rate as
    supported by HHS explanations: 4.93.

    Beneficiaries from an ongoing developmental services demonstration;
    Enrollment growth rates as proposed and approved: Proposed by Vermont:
    6.00;
    Enrollment growth rates as proposed and approved: Approved by HHS:
    6.00;
    HHS benchmark rates and rates as supported by explanations: HHS
    benchmark[A]: 1.52 (S);
    HHS benchmark rates and rates as supported by explanations: Rate as
    supported by HHS explanations: 4.25.

    Source: GAO analysis of data from Vermont and HHS.

    [A] Lower of state historical beneficiary enrollment (S) or estimates
    of Medicaid growth nationwide (N).

    [B] This beneficiary group consists of several small beneficiary
    groups: two main subgroups are those receiving services through
    Vermont's state Medicaid plan and those receiving services through an
    ongoing section 1115 demonstration. HHS approved a 3.52 percent
    enrollment growth rate for the former and a 2.52 percent growth rate
    for the latter.

    [End of table]

    Part, but Not All, of Increase Allowed above Benchmarks Supported:

    Similar to Florida, but to a lesser degree, a portion of Vermont's
    spending limit that exceeds HHS benchmarks was not supported. HHS used
    beneficiary cost and enrollment growth rates to provide the basis for
    Vermont's aggregate spending limit. Although HHS held Vermont's
    beneficiary cost growth rates to the lower of HHS's benchmarks, HHS did
    not do so with regard to enrollment growth rates. HHS approved
    enrollment growth rates that were proposed by Vermont but were higher
    than the benchmarks without adequate documentation for the higher
    growth rate (see table 4). HHS officials told us the higher growth
    rates were the results of negotiations. However, such negotiations were
    not well documented. For one group of beneficiaries--families and
    children--HHS approved an enrollment growth rate of 1.99 percent,
    consistent with the state's historical growth but almost twice the 1.05
    percent nationwide benchmark for this group, without explanation. For
    another group--beneficiaries from an ongoing developmental services
    demonstration--HHS allowed the state to exceed the benchmark growth
    rate based in part on a state management plan to cover more people in
    the future by removing them from a waiting list for developmental
    services. For this same group, Vermont supported part, but not all, of
    the spending limit in excess of the benchmarks by presenting a more
    narrowly focused analysis of its historical enrollment data.
    Specifically, for this subset of the state's aged, blind, and disabled
    beneficiary group, Vermont officials identified enrollment growth of
    4.25 percent, higher than the benchmark level for aged, blind, and
    disabled beneficiaries. HHS officials told us that they considered both
    state-specific and nationwide benchmarks before approving Vermont's
    requested enrollment growth rates. We estimate that the higher-than-
    benchmark enrollment growth rates approved by HHS that were not
    supported by explanation and documentation increased Vermont's spending
    ceiling by about $180 million.[Footnote 42]

    HHS also allowed Vermont to include in its spending limit the projected
    costs for "hypothetical" expenditures, that is, expenditures the state
    could have made but did not make. Specifically, HHS allowed Vermont to
    include in its spending limit nearly $67 million that the state was
    authorized to have spent under an ongoing Medicaid section 1115
    demonstration, but that was unspent under the program. At the time of
    its proposal, Vermont had an ongoing 1115 demonstration called the
    Vermont Health Access Program that began in 1996 and was later
    extended. While program expenditures for the Vermont Health Access
    Program were well under that demonstration's spending limit in the
    early years of the demonstration, in 2004 the program began operating
    at a deficit as expenditures exceeded its annual spending targets (see
    fig. 2). Vermont ended this demonstration early because the state could
    no longer afford to incur the deficits. Because of its early
    completion, $67 million under the spending limit for the demonstration
    was unspent.

    Figure 2: Vermont Health Access Program Surpluses and Deficits:

    This figure is a combination line graph showing Vermont Health Access
    Program surpluses and deficits. The X axis represents the year, and the
    Y axis represents the dollars in millions.

    [See PDF for image]

    Source: GAO analysis of information from Vermont.

    [End of figure]

    HHS policy requires a state to capture actual expenditures in its
    spending base, and the $67 million allowed was a hypothetical
    expenditure that did not represent true expenditures of the state under
    its program. We have previously reported a concern about HHS's allowing
    states to include hypothetical costs in their spending limits. For
    example, in 2002, we reported that HHS had approved an inflated
    spending limit for one state by allowing the state to include projected
    costs of covering a population that the state had not actually covered
    under its program.[Footnote 43]

    HHS Has Not Ensured That Demonstrations in Florida and Vermont Maintain
    the Fiscal Integrity of the Medicaid Program:

    HHS has not ensured that demonstrations in Florida and Vermont maintain
    the fiscal integrity of the Medicaid program. In Florida, HHS approved
    the state's use of spending from a problematic supplemental payment
    arrangement that the state had in place prior to the demonstration as
    the basis for allowed spending under the demonstration, without
    correcting all identified problems. A 2005 HHS financial management
    review found several problems with the earlier financing arrangement
    that involved supplemental payments to certain hospitals and other
    health care providers. Among the problems, the HHS review found that
    Florida had incorrectly calculated the level of supplemental payments
    for which federal Medicaid funds could be obtained, resulting in
    inflated payments under the arrangement. Without taking corrective
    action, HHS allowed Florida to use the prior financing arrangement as
    the basis for allowed spending in a $1 billion per year low-income pool
    under its current demonstration. We had, in 2004, recommended that HHS
    establish methods for states' calculations of supplemental payments,
    but HHS has not implemented this recommendation. In Vermont, HHS
    allowed the state to operate a managed care organization and, through
    this arrangement, retain excess revenue from payments to the
    organization for previously state-funded programs. In July 2007, we
    raised concerns about this demonstration's consistency with federal
    law. We recommended that the Secretary reexamine Vermont's
    demonstration and, where appropriate, either modify the terms of the
    demonstration or seek statutory authorization for the state to continue
    the demonstration in its present form.

    Florida Allowed to Use Spending under a Problematic Supplemental
    Payment Arrangement as the Basis for Spending under the Demonstration:

    A key component of Florida's demonstration is a pool of federal, state,
    and local money to supplement payments to the state, or to hospitals,
    clinics, or other providers (see table 5). Florida agreed to
    discontinue its supplemental payment program under the terms of the
    demonstration, but to ensure continued funding for providers that had
    been receiving supplemental payments under the former program,
    requested HHS approval to make supplemental payments through a low-
    income pool. HHS approved a $5 billion low-income pool that allows
    Florida to spend $1 billion per year for the 5 years of the
    demonstration for uncompensated medical care costs to the uninsured and
    underinsured, Medicaid costs above standard Medicaid reimbursement
    rates, health insurance premiums, and insurance products for such
    services provided to otherwise uninsured individuals.[Footnote 44]

    Table 5: HHS-Approved Distribution of Florida's Annual Low-Income Pool
    of Federal, State, and Local Funds, Demonstration Year One:

    Dollars in millions.

    Categories of eligible provider access systems: Hospitals that received
    supplemental payments under the former UPL program;
    Approved distribution of annual low-income pool funds[A]: $141.1;
    Description: Hospitals that serve a significant portion of Florida's
    Medicaid, uninsured, and underinsured population, including those in
    rural areas, with emergency services, inpatient hospital care,
    specialty pediatric care, and primary care.

    Categories of eligible provider access systems: Public, non-state-owned
    hospitals;
    Approved distribution of annual low- income pool funds[A]: 578.0;
    Description: Funds are distributed among four tiers of public hospitals
    depending on whether they receive local tax support and how much
    service they provide to Medicaid beneficiaries and those who lack
    adequate health insurance.

    Categories of eligible provider access systems: Health care providers
    in communities in which the local government provides more than $1
    million to support care for individuals who lack adequate health care
    coverage;
    Approved distribution of annual low- income pool funds[A]: 180.0;
    Description: The local community for providers in this category must
    provide more than $1 million in financial support for hospitals within
    its boundaries to fund care for the uninsured and underinsured.

    Categories of eligible provider access systems: Hospitals that do not
    receive local government support for the uninsured or underinsured or
    whose local governments provide $1 million or less to support care for
    individuals who lack adequate health care coverage;
    Approved distribution of annual low-income pool funds[A]: 80.5;
    Description: These health care providers must devote at least 10
    percent of their care to Medicaid patients and those who lack adequate
    health insurance.

    Categories of eligible provider access systems: Hospitals that operate
    poison control programs;
    Approved distribution of annual low-income pool funds[A]: 3.2;
    Description: Regional poison control centers affiliated with accredited
    medical schools or colleges of pharmacy in Tampa, Jacksonville, and
    Miami, as well as a data center in Jacksonville.

    Categories of eligible provider access systems: Federal Qualified
    Health Centers;
    Approved distribution of annual low- income pool funds[A]: 15.3;
    Description: The state proposed distributing $7.3 million to centers
    that qualify for state funds, but did not determine how to distribute
    the other $8.0 million prior to HHS approval.

    Categories of eligible provider access systems: County health
    initiatives to expand primary care services;
    Approved distribution of annual low-income pool funds[A]: 2.0;
    Description: Funds to expand primary care services in rural areas to
    Medicaid beneficiaries, underinsured, and other low-income uninsured
    individuals who do not qualify for Medicaid.

    Source: GAO analysis of information from Florida.

    [A] Distributions from the low-income pool are subject to authorization
    by the Florida State Legislature.

    [End of table]

    At the time the demonstration was approved, however, HHS also had
    indications that Florida made excessive supplemental payments through
    the existing supplemental payment arrangement, and these concerns had
    not been resolved as of the time the demonstration was approved. A
    September 2005 HHS review of Florida's financing arrangements[Footnote
    45] found that the methods and data used to calculate the amount of
    supplemental payments eligible for federal matching funds were
    unreliable. The reviewer, for example, found that Florida established
    Medicaid UPLs--which cannot exceed what Medicare would pay for the same
    services, and which determine the maximum amount of federal matching
    funds the state could obtain for its supplemental payment program--
    without making adjustments to account for the fact that Medicare
    beneficiaries are typically older and more expensive to treat. For
    example, the review found that the state's estimate of what Medicare
    would pay for hospital services was nearly three times what Medicaid
    would typically pay, which the reviewer questioned. Not adjusting for
    the higher cost of treating Medicare patients inflates the state's
    calculation of allowable payments under the program. HHS's review also
    found that the data used to calculate the supplemental payment levels
    under Medicaid's UPL contained errors and did not provide a reliable
    basis for determining the appropriate payment levels. HHS's 2005 review
    did not estimate the actual allowable payments under the program or the
    extent that the prior supplemental payment arrangement was considered
    excessive or inflated.

    HHS required the state to correct one issue the review had identified
    with the source of the state's own funding for the supplemental
    payments it was making as a condition of approving the demonstration.
    However, HHS did not require Florida to address the problems with the
    methodology and data used to determine the amount of supplemental
    payments eligible for federal matching funds before projecting allowed
    spending under the demonstration. HHS's required terms of the
    demonstration, however, did allow for future adjustments to the
    spending limit under certain circumstances.[Footnote 46] In November
    2006, HHS officials said that problems identified with the improper
    calculation of states' allowed supplemental payment amounts would be
    corrected at a later date.

    Vermont Allowed to Use Medicaid Funds to Supplant State Funding for
    Certain Purposes:

    Under Vermont's demonstration, HHS authorized the state to operate its
    own managed care organization and, through this arrangement, to apply
    federal Medicaid matching funds to programs that were previously funded
    by the state and that do not exclusively benefit those eligible for
    Medicaid. Under this approach, the state's Medicaid agency--the Agency
    of Human Services--makes actuarially certified monthly lump-sum
    payments to one of its own offices. That office, the Office of Vermont
    Health Access, serves as the managed care organization for the Medicaid
    program. In state fiscal year 2006, for example, the state Medicaid
    agency made lump-sum payments to its Office of Vermont Health Access of
    $65.4 million per month. The Agency of Human Services, in turn,
    receives federal Medicaid matching funds on these monthly payments. If
    Vermont can operate its public managed care organization and provide
    services to Medicaid beneficiaries for less than $65.4 million per
    month, HHS allows the state, under the demonstration, to spend excess
    revenues on programs that meet any of four broad health care
    objectives: (1) increase health insurance coverage, (2) increase access
    to quality health care for Medicaid enrollees and those lacking
    adequate insurance, (3) improve health outcomes and quality of life for
    Medicaid-eligible individuals, and, (4) encourage public-private health
    care partnerships.

    In fiscal year 2006--the first full year of the demonstration--the
    Vermont-operated managed care organization generated $56.5 million in
    excess revenues and invested $43 million of the funds into various
    programs. HHS allowed Vermont to invest the remainder of the excess
    revenues generated by the managed care organization in a reserve fund
    for future use. Over the 5 years of the demonstration, Vermont
    estimates that it will accumulate $300 million in excess revenues. The
    state plans to use these excess revenues to supplant state funding for
    a number of programs that do not exclusively benefit Medicaid-eligible
    individuals (see table 6). For example, Vermont plans to use excess
    revenues from the demonstration to fund a grant for the University of
    Vermont and to provide loan forgiveness for doctors and dentists.
    Vermont officials indicated that state funds--freed up by investment of
    excess revenues from the demonstration--could then be used to reduce
    Vermont's budgetary constraints, projected in the demonstration's
    proposal as a $656.8 million 5-year shortfall in state funds to pay for
    the state's own share of Medicaid expenditures.

    Table 6: Examples of Vermont's Use of Excess Medicaid Revenues under
    Its Demonstration:

    Dollars in millions.

    State-funded health care program: Residential care for youth/substitute
    care;
    Examples of state fiscal year 2007 investments in health-related
    programs: $10.54;
    Description: Funds for residential care for youth in need of intensive
    behavioral health services.

    State-funded health care program: Mental health programs;
    Examples of state fiscal year 2007 investments in health- related
    programs: 8.25;
    Description: Funds to support access to mental health care and
    treatment services for children and adults.

    State-funded health care program: Department of Education school heath
    services[A];
    Examples of state fiscal year 2007 investments in health-related
    programs: 6.40;
    Description: School health services include the professional services
    of nurses, occupational therapists, physical therapists, mental health
    counselors, certified mental health workers, psychologists, personal
    care aides, and other medical professionals.

    State-funded health care program: University of Vermont-Vermont
    physician training;
    Examples of state fiscal year 2007 investments in health-related
    programs: 3.87;
    Description: A grant to train medical professionals. Funding is used to
    support training of medical professionals and provide services to
    Medicaid-eligible, uninsured, and underinsured Vermonters.

    State-funded health care program: Department of Corrections programs;
    Examples of state fiscal year 2007 investments in health-related
    programs: 2.95;
    Description: Funds to promote community- based and residential
    treatment services for former inmates.

    State-funded health care program: Substance abuse treatment;
    Examples of state fiscal year 2007 investments in health- related
    programs: 2.80;
    Description: Funds for a program providing treatment services for
    individuals who lack health care coverage. Substance abuse treatment
    includes outpatient, intensive outpatient, residential, detoxification,
    and pharmacological treatment services.

    State-funded health care program: Aid to Aged, Blind, and Disabled
    Community Care Level III;
    Examples of state fiscal year 2007 investments in health-related
    programs: 2.62;
    Description: Funds to support payments to community care level III
    aged, blind, and disabled recipients. By law, eligible recipients
    receive a subsistence amount compatible with decency and health
    standards.

    State-funded health care program: Blueprint for Health Program;
    Examples of state fiscal year 2007 investments in health-related
    programs: 1.98;
    Description: Funds for a statewide program intended to advance
    innovative solutions and provide support to help doctors and patients
    effectively manage chronic disease.

    State-funded health care program: Health laboratory;
    Examples of state fiscal year 2007 investments in health- related
    programs: 1.91;
    Description: Funds to cover the nonfederal costs of running the public
    health laboratory, which identifies disease-causing agents in specimens
    from human, animal, and environmental sources.

    State-funded health care program: Tobacco Cessation Program;
    Examples of state fiscal year 2007 investments in health-related
    programs: 1.65;
    Description: Funds to reduce the use of tobacco among Vermonters, with
    an emphasis on discouraging young people from starting to smoke.

    State-funded health care program: WIC Coverage- Special Supplemental
    Nutrition Program for Women, Infants, and Children;
    Examples of state fiscal year 2007 investments in health- related
    programs: 1.17;
    Description: Funds to improve health by informing families about good
    health practices and by providing nutritious foods to eligible
    recipients. The program offers women, infants, and children health
    screenings and nutrition and health education.

    State-funded health care program: Flexible Family/ Respite Funding;
    Examples of state fiscal year 2007 investments in health-related
    programs: 1.14;
    Description: Funds to support eligible families with children or adult
    family members with developmental disabilities, to enhance their
    ability to live together.

    Source: GAO analysis of information from Vermont.

    Note: In state fiscal year 2007, Vermont also used excess revenues to
    invest in other health-related programs, including the state's Health
    Care Authority, Veterans Home, Essential Person Program, and Civil
    Union. In state fiscal year 2007, excess revenue investments totaled
    more than $46.5 million in these and other health-related programs.
    This total does not include 2007 spending on Department of Education
    school health services, which was pending as of November 2007.

    [A] Vermont officials indicated that spending on Department of
    Education school health services represents state fiscal year 2006
    expenditures. State fiscal year 2007 expenditures for this program were
    pending as of November 2007.

    [End of table]

    The Vermont arrangement generates excess administrative reimbursement
    in two ways. First, HHS allowed the Agency of Human Services to pay its
    Office of Vermont Health Access at a rate that, while typical for
    private managed care organizations, is higher than the rate Vermont had
    been paid prior to the demonstration and higher than average Medicaid
    agency administrative costs. Second, because the payments for which
    matching funds are provided are lump-sum payments that include the
    managed care organization's administrative costs, HHS pays a higher
    portion of the administrative costs associated with the managed care
    organization than it pays for administrative costs in the rest of
    Vermont's Medicaid program or in Medicaid programs in other states. At
    the state's historical rate and in a proportion consistent with other
    states' administrative costs, Vermont would have received an estimated
    $71 million less.[Footnote 47]

    The reimbursement attributable to administrative costs could help
    ensure that the state has excess revenues for the state's purposes,
    including supplanting state funding for non-Medicaid programs. A
    September 2005 independent review and risk analysis conducted by a
    consultant to Vermont concluded that the likelihood that there would be
    savings under the demonstration available to be used for programs
    formerly funded with state dollars was very high for two reasons.
    First, the spending limit and corresponding premium structure of the
    managed care organization assumed a 9 percent administrative cost
    component, which is typical for private managed care organizations but
    nearly double the average state Medicaid agency administrative costs.
    According to the consultant, such costs typically run in the 3 to 5
    percent range. According to HHS data, administrative costs averaged 4.6
    percent nationwide in fiscal year 2005. Second, unlike the situation
    where the state contracts with a private managed care organization,
    there is an incentive to pay the state-operated managed care
    organization on the high end of the actuarial range approved for the
    managed care premium because any excess payments can be used for state-
    funded programs.[Footnote 48]

    This financing arrangement allows Vermont to increase federal Medicaid
    payments to the state without a commensurate increase in state Medicaid
    spending. The state agency, by making a payment to itself in excess of
    the cost of providing Medicaid services, generates federal matching
    funds, which can be used to supplant state spending on certain
    programs. This supplanted state money, in turn, can be used to reduce
    Vermont's projected $656.8 million 5-year shortfall in state funds for
    Medicaid, thus generating even more federal matching funds in a process
    known as recycling. Curtailing practices that allow states to reduce
    the proportion of Medicaid spending for which they are responsible has
    been part of the ongoing congressional scrutiny of Medicaid
    programs.[Footnote 49]

    In a letter to the Secretary of HHS, we raised concerns about the
    Vermont program's consistency with federal law. These concerns stemmed
    from HHS's decision to allow the state to operate its own managed care
    organization and, through this arrangement, to apply federal Medicaid
    matching funds to programs previously funded by the state. The approval
    of the Vermont program raised the question whether the Vermont Medicaid
    agency could enter into a managed care contract with one of its own
    offices and receive federal matching funds for lump-sum payments to
    that office rather than for payments based on actual costs. The letter
    also noted that in connection with its managed care regulations, HHS
    has expressed concerns about states obtaining federal matching funds
    through managed care contracts for state-funded services for which such
    funds would not ordinarily be available. Given our concerns, we
    recommended that the Secretary of HHS reexamine the demonstration and,
    where appropriate, either modify its terms or seek statutory
    authorization for it to continue in its current form.[Footnote 50]

    Conclusions:

    After examining HHS's approvals of demonstrations in Florida and
    Vermont, our long-standing cost and oversight concerns related to HHS
    approvals of comprehensive Medicaid demonstration proposals remain. In
    determining the budget neutrality of proposed demonstrations, HHS
    approved spending limits for Florida and Vermont that exceeded its own
    benchmarks without adequately supporting the basis for the deviations.
    Our findings in Florida and Vermont are similar to the concerns we
    raised in our earlier reports--during its budget neutrality process,
    HHS did not adequately support the deviations from benchmark rates that
    it allowed in the development of states' spending limits, or clearly
    document and make public the basis for the approved limits. When
    combined, the spending limits approved for Florida and Vermont are
    nearly $7.2 billion more than what the documentation and explanations
    support for the demonstrations. Given the significant federal
    expenditures for these demonstrations, improved accountability and
    transparency in HHS's budget neutrality process, including in the
    approval of states' spending limits, is warranted.

    HHS's approvals in Florida and Vermont also raise concerns about
    precedents they establish that affect the federal and state partnership
    and fiscal integrity of the Medicaid program. By allowing Florida to
    use spending from a prior supplemental payment arrangement as the basis
    for new spending without correcting known problems, and by allowing
    Vermont to create its own state-run managed care organization and use
    excess revenue to fund other state programs, HHS has not taken the
    steps needed to ensure that Medicaid funds are used for Medicaid
    purposes. HHS has not corrected the problems it found with historical
    spending under Florida's supplemental payment arrangement--historical
    spending that was used to set the spending limit under the
    demonstration--and reexamined the level of Florida's spending limit
    accordingly. We believe a related recommendation from our 2004 report
    on the fiscal integrity of state Medicaid supplemental payment
    arrangements remains valid: that the department establish uniform
    guidance to states setting forth acceptable methods for calculating
    supplemental payment arrangements, such as the one that served as the
    basis for Florida's low-income pool. Such guidance could help ensure
    that payments under ongoing supplemental payment arrangements, and any
    related demonstration proposals, are appropriate in the future. HHS
    agreed to implement this recommendation in responding to our 2004
    report, but as of December 2007 had not done so.

    Our concerns about HHS approvals extend beyond those related to costs
    and oversight. The Secretary's approval of the Vermont demonstration
    establishes a precedent for future proposals, but raises legal
    concerns. As of January 2008, HHS had no plans to implement our July
    2007 recommendation to address concerns with the demonstration's
    consistency with federal law. Because HHS disagrees with this
    recommendation--and other recommendations we have made to improve the
    demonstration review process--we are elevating this and other
    recommendations to the Congress for its consideration.

    Matters for Congressional Consideration:

    The Congress should consider requiring increased attention to fiscal
    responsibility in the approval of section 1115 Medicaid demonstrations
    by requiring the Secretary of HHS to improve the demonstration review
    process through steps such as (1) clarifying criteria for reviewing and
    approving states' proposed spending limits, (2) better ensuring that
    valid methods are used to demonstrate budget neutrality, and (3)
    documenting and making public material explaining the basis for any
    approvals.

    The Congress should consider addressing whether demonstrations that
    allow states to operate public managed care organizations and retain
    excess revenue to support programs previously funded by the state--
    including the Vermont demonstration--are within the scope of the
    Secretary of HHS's authority under section 1115 of the Social Security
    Act.

    Recommendation for Executive Action:

    To help ensure that the Florida demonstration will maintain the fiscal
    integrity of the Medicaid program, we recommend that the Secretary of
    HHS ensure that the level of supplemental payments for which the state
    could have obtained federal Medicaid funds in the absence of the
    proposed demonstration is calculated using appropriate methods and
    accurate data sources, and adjust the approved spending limit
    appropriately.

    Agency and State Comments and Our Evaluation:

    We provided a draft of this report for comment to HHS, Florida, and
    Vermont. All three provided written comments which we summarize and
    evaluate below. The full text of HHS's comments is reprinted in
    appendix II along with our response to certain comments. Florida's and
    Vermont's comments are reprinted in appendixes III and IV,
    respectively. HHS and each state also provided technical comments,
    which we incorporated as appropriate.

    HHS Comments and Our Evaluation:

    In commenting on a draft of this report, HHS strongly disagreed with
    our findings, conclusions, and recommendation, stating that the draft
    report mischaracterized the nature of the approved demonstration
    programs and HHS's budget neutrality policies. We based our
    characterizations of HHS programs and policies on documentation
    obtained from HHS and states and interviews with HHS and state
    officials; we believe we have captured and reported them accurately. In
    its comments, HHS also said that our analysis did not adequately
    account for the likelihood of differences in professional
    interpretation in quantifiable analyses. HHS emphasized that the
    demonstrations are approved at the discretion of the Secretary of HHS
    and that the review of demonstration proposals includes both budgetary
    and programmatic elements. We recognize that the Secretary has some
    discretion in approving demonstrations and in establishing policies and
    processes for doing so. But we believe that to maintain accountability
    and transparency in the Medicaid program, of which section 1115
    demonstrations are a major component, the Secretary has the
    responsibility to approve demonstrations based on clearly articulated
    policies and spending limits that are consistent with these policies.
    In conducting our work and preparing the draft report, we accepted
    HHS's explanations for spending limit amounts that deviated from HHS's
    benchmarks when they were clearly articulated and documented. Our draft
    report acknowledged these explanations in noting that some of the
    deviations from the benchmarks were explained. We did not, however,
    accept estimates when program officials could not clearly articulate
    the reasoning they had used, demonstrate how this reasoning was
    consistent with budget neutrality and fiscal integrity principles, and
    explain how the resulting spending limits were derived.

    HHS Comments Related to Past GAO Reviews on 1115 Demonstration and
    Fiscal Integrity Issues:

    HHS commented that we unnecessarily cite points from prior reviews
    regarding section 1115 demonstrations. We cite our earlier work to
    provide a broader perspective and context for our discussion about
    individual states. We also use our prior work as a basis to highlight
    actions that we have recommended that HHS take and that relate to
    problems we identified in this review, but that HHS has not acted upon.
    We believe it is an important part of our work to underscore recurring
    problems as well as areas where HHS has made significant progress.

    HHS also said that we had not given the agency sufficient credit for
    the steps it has taken to ensure fiscal integrity within the Medicaid
    program, stating that we overlooked and understated the progress HHS
    has made since the early 1990s to curtail improper financing
    arrangements. HHS said that the draft report inappropriately focused on
    our 2004 report that did not address related issues and omitted mention
    of our other relevant reports, including those that had recognized
    HHS's efforts. The reports we have cited were those that focused on
    areas relevant to the scope of this work. We have acknowledged in
    earlier reports that the agency has taken a number of steps in recent
    years to strengthen Medicaid's financial management, but in the
    particular areas of concern here--the demonstration criteria, methods,
    and documentation for agreed-upon spending limits--HHS has chosen not
    to make changes that would better ensure accountability and
    transparency. In 2002 and 2004, we recommended that HHS undertake these
    changes. Because it has not, we now raise these as a matter for
    congressional consideration.

    HHS Comments Related to the Application of Budget Neutrality Policy:

    HHS stated that there are multiple methods of establishing that a
    project is budget neutral and that each agreement must be considered as
    part of a larger picture, and suggested that we inappropriately
    characterized HHS's internal guideline as a "benchmark policy" and then
    criticized HHS for making minor adjustments for real-world factors that
    could affect a state's spending. We presented the information on HHS's
    policy in the draft report as found in written HHS guidelines on its
    Web site in March 2007 and as told to us by HHS officials. As noted in
    the draft report, HHS's policy for reviewing and approving
    demonstration proposals and their spending limits lacks transparency.
    HHS's complete policy should be clearly identifiable, in writing, and
    publicly available. Furthermore, we disagree that adjustments that
    account for billions of dollars in federal spending, without
    documentation and explanation, are of a minor nature. Agreements that
    commit the federal government to reimbursing states tens of billions of
    dollars should be documented and include explanations of the basic
    reasoning behind the final spending limits, including the adjustments
    to benchmarks that have been approved.

    HHS's Comments Related to Approvals of Florida and Vermont
    Demonstrations:

    HHS noted that one of its most significant concerns about the draft was
    that it failed to acknowledge that HHS had capped Medicaid program
    growth in Florida, which had averaged 13 percent in recent years. We
    disagree. As noted in the draft report, HHS approved a per person
    spending limit for Florida's demonstration; however, there is no
    aggregate cap on spending in Florida similar to that in Vermont, where
    HHS placed a cap on total spending.

    HHS also strongly disagreed with our recommendation that it recalculate
    the Florida spending limit using appropriate methods and data sources
    and adjust the spending limit accordingly. HHS indicated that Florida's
    data and methods for calculating payments for its supplemental payment
    program were irrelevant to the development of the Florida
    demonstration. We disagree that Florida's calculations were not
    relevant to the Florida demonstration, since Florida's historical
    payments were used as a basis for the low-income pool spending limit
    under the demonstration, and as a result, the spending limit allows for
    continuation of spending that a HHS review suggests should not have
    been allowed.

    With regard to HHS's approval of the Vermont demonstration, HHS
    disagreed with our concerns and prior recommendation to reexamine the
    terms of the demonstration and, where appropriate, to either modify its
    terms or seek statutory authority for the demonstration to continue in
    its current form. HHS maintained that issues of legal authority were
    adequately and appropriately addressed in the information provided to
    us during the course of our fieldwork. We disagree and note that HHS
    has not addressed the concerns raised in our July 2007 letter.

    HHS also commented that our concern regarding excessive reimbursement
    for administrative expenditures for the public managed care
    organization in Vermont was unwarranted because all demonstration
    revenue must be spent for demonstration purposes and costs matched by
    federal funds would be clearly identified. Our concern remains that the
    broad scope of costs identified as for "demonstration purposes"--for
    example, funding the state public health laboratory--can allow Vermont
    to shift costs to the federal government that were previously funded by
    the state and that do not exclusively benefit individuals eligible for
    Medicaid.

    Comments from Florida and Vermont and Our Evaluation:

    We provided a draft of this report to Florida and Vermont. Florida
    stated that during the negotiations over the demonstration waiver,
    state officials worked closely with HHS to ensure that all data and
    documentation were provided in a timely and accurate manner to support
    the waiver application. Vermont indicated that the state had assumed an
    unprecedented amount of risk related to program expenditures in
    exchange for the flexibility granted by the Secretary and that state
    and federal staff had engaged in extensive discussion and analysis of
    Vermont's historical expenditures, cost and caseload trends, and
    program policies in arriving at the final budget neutrality spending
    limit. Vermont also questioned our finding that HHS agreed to reimburse
    the state's administrative expenditures under the demonstration at a
    rate higher than prior to the demonstration, indicating that an
    independent actuary relied on Vermont's historical administrative
    expenditures in developing this component of the capitation rate.

    We agree that the states provided data and documentation to HHS to show
    the basis for their demonstration proposals. Our concern remains,
    however, with the lack of sufficient documentation showing how the
    final spending limits were derived, particularly since they were
    different from the proposals and were based on assumptions about cost
    and enrollment growth that were higher than HHS's benchmarks. Finally,
    we base our finding that HHS agreed to reimburse Vermont at a rate
    higher than what the state received prior to its demonstration in part
    on our review of the independent actuary's report.

    As arranged with your offices, unless you publicly announce the
    contents of this report earlier, we plan no further distribution until
    30 days after its issuance date. At that time, we will send copies of
    this report to the Secretary of Health and Human Services, the
    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 [hyperlink, http://www.gao.gov].

    If you or your staff members have any questions, please contact me at
    (202) 512-7114 or kanofm@gao.gov. Contact points for our Offices of
    Congressional Relations and Public Affairs may be found on the last
    page of this report. Major contributors to this report are acknowledged
    in appendix V.

    Signed by:

    Marjorie E. Kanof:

    Managing Director, Health Care Issues:

    [End of section]

    Appendix I: Scope and Methodology:

    Section 1115 of the Social Security Act provides the Secretary of
    Health and Human Services the authority to approve demonstration
    projects that test policy innovations likely to further the objectives
    of certain programs, including Medicaid. Under section 1115, the
    Secretary has authority to waive provisions of the Social Security Act,
    allowing states to operate demonstrations, and to provide federal
    Medicaid matching funds for states' costs that otherwise cannot be
    matched under federal law.

    Section 1115 demonstrations vary in scope, from targeted demonstrations
    limited to specific services or populations, to comprehensive
    demonstrations affecting Medicaid populations and services throughout a
    state and including most of a state's Medicaid expenditures. For
    example, a section 1115 demonstration in Virginia that the Department
    of Health and Human Services (HHS) approved in July 2002 affects
    limited Medicaid services--family planning services--for about 8,300
    beneficiaries. A section 1115 demonstration in New York that HHS
    approved in July 1997, on the other hand, changes the delivery of a
    broad range of Medicaid benefits for over 2.5 million beneficiaries
    from fee-for-service to managed care.

    Our review addressed the budget neutrality[Footnote 51] and fiscal
    integrity of recently approved, comprehensive section 1115
    demonstrations. We selected demonstrations to include in this review
    based on when they were approved and whether they were comprehensive
    and accounted for a major portion of the state's Medicaid program.
    Specifically, we selected demonstrations based on the following:

    1. Approval by HHS from July 2004 (when we last reviewed HHS-approved
    section 1115 demonstrations[Footnote 52]) through December 2006.

    2. Meeting HHS's definition of comprehensive, that is, those that
    affect a broad range of services for Medicaid populations statewide.

    3. The demonstration accounted for greater than 50 percent of the
    state's Medicaid expenditures.

    We used a two-step process to identify demonstrations that met our
    criteria. First, to identify comprehensive section 1115 demonstrations
    approved by HHS from July 2004 through December 2006, we reviewed a
    Centers for Medicare & Medicaid Services (CMS) report that listed all
    section 1115 demonstrations approved through February 2006 and updated
    the list though discussions with agency officials.[Footnote 53] Four
    comprehensive demonstrations met these criteria: the California Medi-
    Cal Hospital Uninsured Care program; the Florida Medicaid Reform
    program; the IowaCare program, and the Vermont Global Commitment to
    Health program.

    Second, to identify which of these four demonstrations met our third
    criterion that expenditures under the demonstration account for a
    majority of state Medicaid spending, we compared estimated first-year
    spending under the demonstration to 2004 total Medicaid spending in
    each state. First-year spending in two of the four states, California
    and Iowa, was less than 5 percent of total 2004 Medicaid spending, so
    we did not include these two states in our study. First-year
    demonstration spending in Florida and Vermont was projected to account
    for 59.9 and 117.2 percent, respectively, of 2004 Medicaid spending, so
    we included the demonstrations in these two states for further review
    in our study.

    To determine the extent to which the Secretary of HHS ensured that
    Medicaid section 1115 demonstrations would be budget neutral to the
    federal government prior to approving them, we reviewed HHS's policies
    for determining budget neutrality as documented on HHS's Web site and
    in information provided by HHS officials. We examined each state's
    projection of the total spending needed to maintain its existing
    Medicaid program in the absence of the proposed demonstrations.
    Specifically, we assessed the extent to which each state's assumptions
    about per person cost and beneficiary enrollment growth conform to
    HHS's policy that these growth rates are the lower of state-specific or
    nationwide benchmarks of Medicaid growth.[Footnote 54] In instances
    where per person and beneficiary enrollment growth rates exceeded the
    lower of these two benchmarks, we asked HHS and state officials for
    explanations and documentation to support the higher growth rates HHS
    approved. We also compared spending limits for the demonstrations--
    based on the per person cost and beneficiary enrollment growth rates
    HHS approved--against (1) our estimates of demonstration spending
    limits had HHS required Florida and Vermont to have spending limits
    consistent with benchmarks and (2) our estimates of the spending limits
    had HHS held per person cost and beneficiary enrollment growth in each
    state to levels we determined that HHS and state officials had
    explained with quantified support. HHS's policy states that adjustments
    to benchmark growth rates should address anomalies in the underlying
    data.

    To determine the extent to which HHS ensured that the Florida and
    Vermont demonstrations maintain the fiscal integrity of the Medicaid
    federal-state financial partnership, we evaluated HHS's process for
    reviewing section 1115 demonstration proposals and reviewed related
    financial management reports. We interviewed HHS officials from the
    Center for Medicaid and State Operations that has direct oversight
    responsibilities for these demonstrations, including officials from the
    Division of Reimbursement and State Financing who reviewed funding of
    the demonstrations in Florida and Vermont to ensure consistency and
    compliance with federal requirements. We also interviewed state
    officials to gain their understanding of the waiver authorities HHS
    granted each state by approving its demonstration, as well as their
    understanding of the special terms and conditions that govern each
    demonstration. We also relied on the work conducted for an earlier
    study that reviewed the consistency of the Florida and Vermont
    demonstrations with federal law.

    Our findings concerning HHS's approval of these two states'
    demonstrations cannot be generalized to HHS's approval of other states'
    demonstrations. We used the selection criteria discussed above for
    purposes of assessing HHS's process as it was applied in these
    particular cases of importance. We considered these cases to be
    important because they allowed significant changes in the states'
    Medicaid programs and the majority of the states' Medicaid spending was
    governed by the terms of the demonstrations.

    To assess the reliability of the data submitted by states to HHS to
    calculate historical state spending and enrollment growth rates, we
    reviewed the steps HHS takes to ensure the accuracy of spending data
    compiled in states' automated Medicaid information systems. We obtained
    the data states' submitted to HHS and reviewed them for anomalies and
    missing information. We also interviewed HHS and state officials
    knowledgeable about the data. We discussed limitations of the automated
    Medicaid data, such as potentially incomplete data and states' ability
    to revise data for up to 2 years, with HHS officials. Because the data
    used to establish spending limits were for a time frame for which the
    states' data should have been largely completed and finalized, we
    concluded that states' Medicaid spending and enrollment data are
    sufficiently reliable for the purposes of this report.

    We conducted our work from June 2006 through January 2008 in accordance
    with generally accepted government auditing standards.

    [End of section]

    Appendix II: Comments from the Department of Health and Human Services:

    Note: GAO comments supplementing those in the report text appear at the
    end of this appendix.

    Department Of Health & Human Services:
    Centers for Medicare & Medicaid Services:

    Office of the Administrator:
    Washington. DC 20201:

    Date: December 21, 2007:

    Subject: Government Ac our ability Office (GAO) Draft Report: "Medicaid
    Demonstration Waivers: Recent HHS Approvals Continue to Raise Cost and
    Oversight Concerns" (GAO-08-87)

    Overview:

    We appreciate the opportunity to comment on the GAO draft report,
    "Medicaid Demonstration Waivers: Recent HHS Approvals Continue to Raise
    Cost and Oversight Concerns" (GAO-08- 87). Section 1115 demonstrations
    are an important tool for use at the Secretary's discretion to test
    innovations in health care delivery and coverage and by longstanding
    Department policy, must be budget neutral to the Federal Government.
    These demonstrations test important new ideas while extending health
    care coverage to thousands of low-income Americans who would otherwise
    lack that coverage.

    The draft report discusses two approved demonstration projects, and
    contains only one substantive recommendation. There is no
    recommendation for executive action for the Vermont section 11 15
    Global Commitment to Health Demonstration. With respect to the Florida
    section 1115 Demonstration, the draft report recommends that the
    Secretary of the Department of Health and Human Services (HHS) "ensure
    that the level of supplemental payments for which the State could have
    obtained Federal Medicaid funds in the absence of the proposed
    demonstration is calculated using appropriate methods and accurate data
    sources" (p. 34). It further urges the Secretary to adjust the approved
    spending limit accordingly. We disagree with this proposed
    recommendation. for reasons set forth in the discussion below.

    As we have noted through repeated meetings over the course of more than
    a year, involving hundreds of staff hours, we also disagree strongly
    with many of the characterizations and findings in the draft report in
    addition to that recommendation. The draft report makes numerous
    inaccurate assertions and characterizations with regard to both budget
    neutrality and Medicaid fiscal integrity. For example, the new draft
    report mischaracterizes the nature of these Secretarially-approved
    demonstration programs and the Secretarially-defined policies
    surrounding their approval, and does not adequately account for the
    likelihood of differences in professional interpretation in
    quantifiable analyses. Moreover, the draft report does not consider
    HHS' policies to focus limited federal resources to ensure Medicaid
    compliance and fiscal integrity in payments under ongoing State plans
    and demonstrations on a going-forward basis. As a result, the draft
    report seriously distorts HHS' efforts with respect to our fiscal
    integrity activities.

    This Administration's unparalleled commitment to correcting financing
    issues within the Medicaid program has been extremely successful in
    ensuring that claimed Medicaid expenditures are based on appropriately
    financed expenditures that are not redirected for other purposes.
    Moreover, this Administration has approved significant demonstration
    projects that would expand Medicaid eligibility, coverage and access to
    providers. These are initiatives in which the Federal Government
    obtains a tangible result such as the creation of Provider Access
    Systems in Florida, coverage initiatives in California, and the
    universal coverage commitment in Massachusetts. These program
    components of section 1115 demonstrations have a serious real- world
    impact on the lives of many low-income people.

    Restatement of Past HHS Responses to GAO on 1 115 Demonstration Issues:

    In this draft report, GAO unnecessarily reasserts points made in prior
    reviews with regard to 1115 demonstrations, With regard to these
    points, HHS continues to stand by the responses we provided to the May
    8, 2007 draft document, "Medicaid Demonstration Waivers: Lack of
    Opportunity for Public Input During Federal Approval Process Still a
    Concern" (GAO-07-694R). That response detailed the extensive efforts
    HHS has undertaken to make sure that the 1115 demonstration review
    process is transparent and to provide opportunities, as well as
    documenting the significant opportunities for public input during State
    legislative and administrative processes.

    Also, GAO raised technical and legal questions pertaining to waivers
    granted to allow the implementation of the Florida and Vermont
    demonstrations, in a policy letter sent to Daniel Meron, General
    Counsel of HHS. We believe that the issues of legal authority, program
    effects on the beneficiary, cost-sharing, and the HHS evaluation
    process were all adequately and appropriately addressed in the April
    26, 2007, response from Dennis Smith to Lynn H. Gibson, Managing
    Associate General Counsel of GAO.

    Medicaid Fiscal Integrity:

    Disappointingly, the report is significantly lacking in its discussions
    pertaining to Medicaid fiscal integrity. The criticism of the Agency's
    efforts in the section of the GAO's draft report related to CMS' fiscal
    oversight of State financing is not supported by actual evidence. HHS
    believes GAO has overlooked and understated the progress that CMS has
    made since the early 1990s to curtail improper financing arrangements.
    Also, GAO has overstated its involvement, indicating that GAO has
    reported improper financing arrangements numerous times, but only
    citing one such report (from 2004). This is unfair and severely
    understates the Agency's significant efforts over the past 4 years to
    end impermissible financing arrangements. We note further that our
    efforts to end such arrangements have been recently highlighted by the
    GAO itself in a March 2007 report.

    This draft report continually references a February 2004 GAO report
    (MEDICAID: Improved Federal Oversight of State Financing Schemes is
    Needed GAO-04-228) to support an allegation that CMS has allowed
    improper State financing in the approval of both the Vermont and
    Florida 1115 demonstrations and to intentionally imply that CMS has not
    made efforts to ensure proper State financing since the release of
    GAO's February 2004 report. However, the primary scope of the February
    2004 GAO report related to CMS' implementation of-nursing home upper
    payment limit (UUPL) transition periods, the significant majority of
    which have expired. According to the precise language of the referenced
    2004 report, "GAO was asked to examine CMS' oversight of nursing home
    UPL arrangements. including the status of and the basis for transition
    period decisions. None of GAO's recommendations in the 2004 report
    addressed State financing, as is suggested by the following statement
    on page 7 in this report:

    (See comment 1.):

    "Additionally, an earlier recommendation from our 2004 report on
    Medicaid fiscal integrity issues�a recommendation that 1111S agreed to
    implement hut thus far has not that HHS establish uniform guidance to
    states that set forth acceptable methods related to state financing
    arrangements remains valid."

    Because the 2004 GAO report did not address financing arrangements,
    this statement in the draft report is misleading. Moreover, this draft
    report erroneously suggests that Medicaid payment limit necessarily
    result in proper sources of State financing for the Medicaid program.
    This is inaccurate. A UPL test that complies with Federal requirements
    does not ensure that the financing of the non-Federal share of the
    Medicaid payments is proper. Instead, UPL demonstrations under the
    Medicaid State plan (i.e., Medicaid payment limits) and sources of the
    non-Federal share of Medicaid payments (i.e., State financing) are
    separate issues, governed by separate statutory and regulatory
    authority. (See Attachment 1 for further information related to CMS'
    position regarding the above-referenced recommendation in the February
    2004 GAO report.)

    Additionally, this draft report omits mention of a March 2007 GAO
    report (Medicaid Financing: Federal Oversight Initiative is Consistent
    with Medicaid Payment Principles but Needs Greater Transparency GAO-07-
    214) in which GAO acknowledged significant fiscal oversight efforts on
    the part of CMS including the fact that CMS had ended improper
    financing arrangements in 29 States. Equally remarkable in this draft
    report is the omission of mention of the June 2006 GAO report (Medicaid
    Financial Management: Steps Taken to Improve Federal Oversight but
    Other Actions Needed to Sustain Efforts GAO-06-705), in which GAO
    acknowledged nine specific areas of improvement to CMS' Federal
    oversight efforts. including improved efforts to oversee State claims
    for Federal reimbursement, enhanced ability to address high-risk Slate
    funding practices, and the creation of goals to reduce inappropriate
    Federal reimbursement. The exclusive and continual reference to the
    GAO's February 2004 report to support current findings is troublesome.

    (See comment 2.):

    This draft report inaccurately states that CMS acceptance of the data
    sources historically utilized by Florida to perform an inpatient
    hospital UPL demonstration under the Medicaid State plan reflects a
    lack of commitment on the part of CMS to the fiscal integrity of the
    Medicaid program. As described in detail below, Florida's historical
    use of certain data sources was largely irrelevant to the development
    of the Low-Income Pool under Florida's 1115 demonstration. In addition,
    the treatment of Florida was consistent with the treatment accorded
    other States. Consistent treatment of all States in the assessment of
    financing was a key recommendation of GAO's March 2007 report. As CMS
    indicated in its February 16, 2007 response to the GAO's draft 2007
    report, CMS has instituted processes to ensure consistent treatment to
    all States, which included a series of standardized questions posed to
    all States under the Medicaid State plan amendment review process and a
    prospective termination of State financing arrangements that were
    inconsistent with Federal requirements. It appears the GAO omitted any
    reference to the March 2007 report because, by doing so, it would
    expose the illogical finding included in this report.

    This draft also inaccurately faults CMS for allowing the Vermont
    managed care organization to be reimbursed in an amount greater than
    cost. Contrary to that assertion, the Special Terms and Conditions for
    Vermont specify that the managed care organization must spend all its
    revenue under the demonstration for demonstration purposes. GAO
    suggests that CMS allowed the State to retain excess revenue and use
    the funds to support health-related programs previously funded by the
    State and that do not exclusively benefit Medicaid beneficiaries.
    However, under the Vermont demonstration, CMS has ensured the
    transparent identification of costs for which Federal matching funds
    are available by clearly identifying the expenditures to which Vermont
    must adhere with the revenue received by the managed care organization.

    (See comment 3.):

    Budget Neutrality�Unsubstantiated Allegations about Application of
    Policy

    The HHS staff has spent significant time educating GAO staff on the
    subject of budget neutrality, in addition to the equally lengthy
    discussions on fiscal integrity noted above. As you may know, budget
    neutrality has been a longstanding Departmental requirement of health
    care reform projects that the HHS has approved since 1994, and across
    two different administrations. Budget neutrality is, by its nature, an
    important requirement, for it ensures that the Federal Government does
    not spend more under a demonstration project than it would have absent
    that demonstration. There are multiple methods of establishing that a
    project is budget neutral, and each budget neutrality agreement must be
    considered as part of a larger picture of whether a State's proposal,
    in the Secretary's estimation, promotes the objectives of the relevant
    title of the Social Security Act (in these instances, Title XIX). These
    projects are approved at the discretion of the Secretary of HHS, and
    this discretionary review includes both budgetary and programmatic
    elements. This, however, is not to say that there is no guidance for
    external audiences or guidelines that are used in negotiations with
    States--or that HHS' application of these self determined budget or
    program parameters have been arbitrary or inconsistent. Nor is it to
    say that "everything is negotiable" about budget agreements. HHS spends
    many staff hours with States providing technical assistance and
    education about budget neutrality.

    The HHS has, as consistent with policy under this Administration, used
    as a starting point for discussions with States, a policy of using the
    lower of State historical spending or the projections from the
    President's Budget, sometimes referred to as the "lower-of' guideline.

    States are required to provide historic experience with their
    proposals. This begins a review performed by a Federal team, and
    analyses are performed using the "lower-of' guideline provided above.
    What follows are discussions with States to determine if any of the
    historical experience was affected by unusual events that render the
    data suspect for trend development, and therefore the prediction of
    future spending.

    The GAO has throughout its discussion documents and draft report,
    characterized our Agency's own internally-developed guideline as a
    "benchmark policy"-- and then criticized HI-IS for making relatively
    minor adjustments for real-world factors that could affect a State's
    spending. A few such examples include eligibility changes, benefit
    coverage changes (such as the implementation of Medicare Part D),
    claims processing abnormalities, and the like. In such instances the
    cost trend analysis can then be adjusted using techniques that are
    acceptable in statistical analysis and evaluations in order to yield a
    more "robust" analysis. GAO's characterization of our longstanding
    "lower-of' guideline as a "benchmark policy" misrepresents the
    guideline as being an inflexible standard. Instead it is applied as an
    initial position that is subject to adjustment based on actual
    expenditures experience based on our professional judgment. These
    adjustments, and the selection of the most appropriate "benchmark" are
    issues on which there can be differences in professional
    interpretation, as noted above. The draft report thus mischaracterizes
    the Department's policy.

    (See comment 4.):

    We also believe that the application of GAO's apparent interpretation
    would severely limit the negotiating strength of an HHS Secretary under
    any Administration in promoting and testing new ideas in the health
    care marketplace.

    (See comment 4.):

    State-Specific Comments and Issues:

    In the sections below we will address State-specific issues raised in
    this report, with respect to budget neutrality, program questions, and
    fiscal integrity. CMS officials spent countless hours meeting with GAO
    staff to provide explanation of the efforts put forth by CMS under the
    Medicaid State plan amendment financing initiative to ensure that
    Florida's and Vermont's Medicaid programs were properly funded.
    Unfortunately, the substance of those meetings has been omitted from
    this draft report, and we do not believe the information included in
    this report is accurately represented.

    Florida-Specific Issues:

    The GAO contends that HHS did not adequately ensure that Florida's
    Medicaid demonstration would be budget neutral to the Federal
    Government before approving it, and also that HHS' basis for approving
    the higher spending limits was not fully supported by the documentation
    (page 6). HHS believes that the adjustments to the State's historic
    expenditure growth rates were both appropriate and consistent with HHS
    policy to develop rates that are projected to be most reflective of
    projected future without waiver Medicaid expenditures. The established
    agreement reflected a careful analysis of current spending and
    specifically limited how it could grow in the future. One of our most
    significant issues with regard to the draft report is that GAO does not
    acknowledge in any way that HHS succeeded in capping Medicaid program
    growth in Florida which had averaged 13 percent in recent years.

    (See comment 5.):

    The GAO further contends that "HHS allowed Florida to use incorrectly
    calculated levels of supplemental payments as a basis for spending
    allowed under the demonstration" (page 5). Despite GAO's assertion that
    Florida's supplemental payment program is problematic. GAO does not
    provide the detail and financial data to support its position or an
    estimate of how the approved $1 billion annual Low Income Pool (LIP)
    should have been adjusted as a result of the "deficient" supplemental
    payment program. Because of the lack of explanation by GAO, this seems
    to be in conflict with our principle of using actual rather than
    calculated numbers or estimates for without waiver trend line
    development. Additionally, as noted above, as a condition of the
    Florida health reform demonstration, HHS required the State to
    discontinue its inpatient supplemental program, effectively freezing
    the growth of supplemental payments beyond the S1 billion annual
    threshold Moreover, HHS required the State to establish new Letters of
    Agreement between the Florida Agency for Health Care Administration and
    the "Funding Sources" that support the LIP. This ensures that the
    sources of funding are appropriate; an assurance never before available
    to the Federal Government and Federal taxpayers.

    (See comment 6.):

    Alarming also is the GAO position that HHS did not ensure the
    demonstration in Florida maintained the fiscal integrity of the
    Medicaid program prior to approval. As evidenced by materials provided
    by CMS to the GAO, Florida's financing of Medicaid institutional
    service payments, including supplemental payments, was initially
    reviewed under the same State plan fiscal oversight initiative that was
    applied to all States and that was documented in the GAO's March 2007
    report. During that review, Florida provided CMS with the assurance
    that the source of the non-Federal share of Medicaid supplemental
    payments was derived from local tax revenue and that hospitals were
    able to retain 100 percent of the total computable expenditures.

    (See comment 7.):

    While CMS accepted that written assurance from a Florida official, CMS
    continued to review Florida's financing through the Agency's financial
    management review (FMR) process, a process that was specifically
    applied to all States that agreed to terminate particular State
    financing arrangements and to certain States that provided CMS initial
    assurance of proper State financing. CMS initiated the FMR process in
    the affected States to ensure the States were meeting the commitments
    made to end certain financing arrangements and to confirm assurances
    provided by certain States that State financing arrangements were
    consistent with Federal requirements.

    By way of background, the basis for and scope of this type of FMR was
    to ensure nationally consistent policy application and to sustain CMS'
    legal position to challenge future claims; specifically, in the event a
    State continued to make claims for Federal matching funds in State
    fiscal year 2006 with (i) the same source of State financing they
    agreed to terminate at the end of their State fiscal year 2005; or (ii)
    with a source of State financing that was inconsistent with the
    assurance provided by the State under the Medicaid State plan amendment
    review process. CMS developed "internal-only" reports from the results
    of these FMRs while we monitored State claims during all affected
    States' fiscal year 2006. None of these types of FMRs were ever
    released to any of the affected States.

    In the case of Florida, CMS performed an FMR specific to the State
    financing utilized by Florida to make supplemental Medicaid payment to
    hospitals. The scope of this review as delineated in the Atlanta
    regional office's 2005 financial management work plan, was to examine
    whether or not hospitals were returning any of their supplemental
    Medicaid payments to the local Government. As part of the internal-only
    report developed as a result of the FMR, the Atlanta Regional Office
    also incorporated concerns with the sources of data utilized by Florida
    to perform the inpatient hospital UPL calculations based on information
    that was included in the 2005 funding specialist profile.[Footnote 56]

    While the FMR did not reveal that hospitals were returning their
    supplemental Medicaid payments to the State, the FMR did raise concerns
    with the manner in which the local financing was utilized by the State
    as the non-Federal share of the Medicaid supplemental payments. CMS
    used the findings of the FMR to require Florida to make prospective
    changes to their Medicaid program.

    We also take serious issue with GAO's characterization of the LIP
    associated with the Medicaid 1115 demonstration. Although this draft
    report accurately identifies the LIP as a key component of Florida's
    1115 demonstration, the GAO's characterization of the LIP's design is
    inaccurate and misleading. Most importantly, the LIP was not designed
    to continue a supplemental payment program as alleged on page 13 of
    this draft report. "I he GAO appears to concede elsewhere in the draft
    report that such characterization is inaccurate in its expressed
    acknowledgement that "Florida agreed to discontinue its supplemental
    payment program under the terms of the demonstration." (page 26). The
    LIP was designed to utilize funding that had historically been used by
    hospitals to subsidize their care of the uninsured to expand the scope
    of health care services available to Medicaid and uninsured individuals
    and to document such costs in a manner that was transparent to the
    Federal taxpayer.

    The GAO points to State law referencing the UPL to support the position
    that the LIP was merely an extension of the State's UPL program.
    However, it is irrelevant that "Florida law made the State's authority
    for pursuing the proposed demonstration contingent in part on Federal
    approval to preserve the upper payment limit funding mechanism," as is
    footnoted on page 13. It is not unusual for States to require this type
    of funding contingency for a program such as this demonstration before
    the State moves forward. The LIP, as designed in this demonstration, is
    based on historical State spending and is limited to documented costs
    to the State for providing health care. To the extent such costs exceed
    historical spending under the Medicaid supplemental payment program.
    Federal matching funds will not be available. Again. HHS is not
    credited for this noteworthy achievement.

    The draft report questions the data sources utilized under the State of
    Florida's historical inpatient hospital UPL demonstration and, in doing
    so, implies the LIP is inflated. CMS and Florida developed the LIP by
    determining the actual Medicaid supplemental payments that were made in
    excess of actual Medicaid costs. This portion of supplemental spending
    was moved into the LIP pool and formed the LIP ceiling. The State was
    required to remove all supplemental payments from the Medicaid State
    plan and could not make Medicaid payments to hospitals above Medicaid
    cost. Since the initial budget neutrality calculation was based on
    historical spending below the UPL and above Medicaid cost and then
    trended forward, this spending is clearly controlled.

    Budget neutrality has historically been limited to a State's actual
    current law Medicaid spending, meaning spending authorized under its
    approved Medicaid State plan. This spending would include approved
    supplemental payments that were under the State's UPL.

    It should be noted that Florida's UPL demonstration under the State
    plan resulted in approximately $1.6 billion of available spending
    (i.e., "gap"). However. Florida historically made Medicaid supplemental
    payments to hospitals in an amount that was approximately 58 percent of
    that total available spending under the UPL. Hence, the reference to an
    inflated UPL is misleading in that Florida's spending did not
    "maximize" Medicaid supplemental payment spending under the UPL. To
    have limited the State's spending under their UPL program, the
    questioned data would have needed to impact the UPL by inflating it
    nearly 50 percent. The UPL demonstration under the State plan
    successfully caps the State at a much lower amount.

    (See comment 9.):

    The CMS acknowledges that the Florida funding specialist profile
    initially questioned the accuracy of the data sources used by the State
    of Florida in calculating the UPL for inpatient hospital Medicaid
    supplemental payments. CMS does not have an historical enforcement
    practice of challenging the data used by States to perform the UPL
    demonstration under the State plan. As explained earlier, CMS reviews
    UPL demonstrations under the Medicaid State plan amendment review
    process and such review applies to the "methods" by which States
    calculate

    UPLs, not the data sources utilized by States. Under this review
    process, CMS is bound by regulatory timeframes and requires States to
    demonstrate proper UPL "methodologies" supported by readily available
    data to States. This process of reviewing UPL demonstrations under the
    Medicaid State plan amendment process allows CMS to ensure the
    application of uniform guidance to States by setting forth acceptable
    methods to calculate their UPLs, which happens to be the precise
    direction of the continually referenced recommendation of the February
    2004 GAO report.

    Of even greater significance is the GAO's apparent lack of
    understanding related to the structure of and limitations to the LIP.
    On page 28 of the draft report, the GAO incorrectly indicates that CMS
    did not require Florida to address the problems with the UPL
    methodology and the data used to determine the amount of supplemental
    payments when determining the amount available in the LIP under the
    demonstration. On the contrary, the special terms and conditions
    associated with the section 1115 demonstration require Florida to limit
    both Medicaid State plan spending and LIP spending to cost and to
    document allowable costs in a manner consistent with Medicare cost
    principles, including the use of the Medicare 2552-96 hospital cost
    report along with hospital accounting records and audited financial
    statements. Consequently, the design of Florida's LIP under the 1115
    demonstration ensures that Federal matching funds will be limited to
    the "actual" cost of providing inpatient hospital services, not a
    reasonable estimate of what Medicare would pay (i.e., the UPL).

    (See comment 10.):

    The CMS did not address Florida's UPL program because the State has
    discontinued it and has elected to limit its spending to cost. For
    example, if hospitals only incur $600 million of costs that are
    allowable under the Medicaid State plan or the LIP, Federal matching
    funds will only be available as a percentage of those actual allowable
    costs. Moreover, the GAO properly recognizes that the special terms and
    conditions allow CMS to adjust the spending limit under several
    circumstances including impermissible provider payments.

    (See comment 10.):

    Based on the structure of and limitation to the LIP, suggesting a
    retroactive adjustment to historical Medicaid supplemental spending is
    both an inappropriate and unnecessary step to ensure the fiscal
    integrity of Florida's 1115 waiver demonstration.

    (See comment 11.):

    Vermont-Specific Issues:

    As noted above, there was no recommendation for executive action for
    the Vermont section 11 15 Global Commitment to Health Demonstration. In
    its general overview, the GAO speculates that in the approval of the
    Vermont section 1115 Global Commitment to Health Demonstration, I HHS
    did not adequately ensure budget neutrality and the maintenance of
    fiscal integrity of the Medicaid program similar to its assertion with
    respect to Florida above. From what HHS can gamer from the report,
    these contentions are based primarily on four issues; Vermont's
    publicly- run managed care organization (MCO), the use of a higher
    trend rate for enrollment growth, the use of "hypothetical
    expenditures" from the previous Vermont Health Access Plan (VI IA P).

    Demonstration to build a base ceiling, and the arrangement to pay
    administrative costs at a rate higher than previously paid. In prior
    efforts to provide the GAO with an expedient and comprehensive
    explanation HHS has already responded to many of these critiques.
    However, additional clarification is provided to further illuminate the
    Vermont case.

    In 2004-2005, faced with the rising cost of health care and a State
    budget crisis Vermont approached HHS seeking approval under section 1
    115 authority to revamp its health care system to improve quality and
    access, while decreasing cost. In 2005, a new section 1115
    demonstration, The Global Commitment to Health, was approved. The new
    demonstration incorporated the current Vermont section 1115 VHAP
    Demonstration, currently costing significantly more than originally
    projected, and transitioned the State Medicaid program into a publicly
    run MCO. This publicly-run MCO for the State of Vermont is similar in
    concept to the Health Insuring Organizations (HIOs)�also known as
    County-Organized Health Systems--in several counties in the State of
    California where a single publicly-run entity arranges and manages the
    care for Medi-Cal beneficiaries. We note that the HIOs were established
    by Congress in the mid-1980s and are exempt from certain Medicaid
    requirements, and cover many lives in that State (approximately 500,000
    versus the Vermont Global Demonstration's approximately 140,000).

    To begin, it is unclear why GAO characterizes accumulated savings from
    the expired VHAP Demonstration as "hypothetical" when credited to
    VHAP's successor, Vermont Global (pages 21 and 25 of the report and
    elsewhere). The Global Commitment to Health Demonstration was a
    continuation and expansion of VHAP, covering the same populations,
    including expansion populations. It has long been HHS policy to
    determine budget neutrality over the life of a demonstration, and there
    is no reason not to include a clearly related predecessor
    demonstration. Indeed, to make such an exclusion would be a significant
    departure from past policy on 1115 demonstrations across two
    Administrations. Furthermore, any "hypothetical" costs not spent
    secondary to the transition from the prior VHAP Demonstration to the
    Global Commitment to Health Demonstration certainly would have been
    expended if the current V HAP Demonstration had continued in its
    original form.

    (See comment 12.):

    Under the Global Commitment to Health section 1115 Demonstration,
    Vermont is permitted to generate savings in the same manner as a
    privately-managed Medicaid MCO receiving Federal funds. However, per
    the special terms and conditions, Vermont is held to additional
    requirements placed on the publicly run MCO that ensure any savings
    generated are used to fund services and programs designed to serve the
    Medicaid and other low-income populations; meanwhile, the payments via
    the rate-setting are required to be compliant with actuarial
    certification requirements, as are all other Medicaid MCOs.
    Furthermore, the use of savings generated from traditionally
    categorically eligible Medicaid populations to expand services and
    programs to other low-income populations is a fundamental tenet of 1115
    health care reform demonstrations. This, again, is longstanding HHS
    policy across administrations. The authority to approve this
    demonstration rests with section 1 115 and 1903(m)(6)(A), as well as
    the ability of States to operate public MCOs under section 1915 and
    1932.

    See comment 13.):

    Regarding enrollment projections related to budget neutrality for the
    Global Commitment to Health, it appears that GAO contradicts itself
    While at some points in the document it states that HHS does not
    establish benchmarks for enrollment growth trends (page 10, for
    example), at other times it claims that the enrollment trends granted
    violate HI-IS benchmark policy (page 22). Unlike most approved section
    11 15 demonstrations, both enrollment and administrative costs are
    subject to the $4.7 billion Global budget neutrality ceiling (or cap).
    This arrangement places the State at risk for ensuring both enrollment
    and administrative costs remain reasonable and provides the State with
    an incentive to reduce administrative costs and carefully monitor
    enrollment. This is, in fact, a more stringent requirement than those
    in place in most section 1 115 demonstrations, where in fact,
    administrative costs are not usually subject to the budget neutrality
    ceiling. Moreover, as GAO itself highlights in the report (page 31),
    the projected administrative costs closely resemble that of the private
    industry.

    See comment 14.):

    Additional Technical Corrections and Other Comments:

    We also offer the following comments of a more technical nature.

    * The text of the report suggests that HI-IS policy requires that all 5
    years of historical data must be used for the historical trend
    analysis. This misimpression is addressed, but it is buried in a
    footnote (page 20, footnote 40). The Health Insurance Flexibility and
    Accountability Guidance that GAO emphasizes as documentation for the
    Ill IS Benchmark policy requires the "states to submit five years of
    historical data for assessment by CMS, with quantified explanations of
    trend anomalies," with the purpose of selecting the most appropriate
    data and time period to use in the analysis.

    * Page 7, a goal of the Florida demonstration is to provide
    beneficiaries with access that is broader than conventional managed
    care plans; it is also to include Provider Access Systems (PASs). We
    believe GAO should replace "state-approved managed care benefit plans"
    with "state-approved Managed Care Organizations (MCOs) and Provider
    Access Systems (PASs)".

    * Page 10, CMS considers the GAO cited benchmarks to be wrong;
    especially the use of the 4.8 percent President's Budget trend rate for
    Aged, Blind and Disabled does not match-up with the expenditure data.
    The cost data provided by the State excluded Part D expenditures and
    did not include the expenditure and caseload experience of Medicare
    Savings Groups.

    * Footnote 32 (page 15) is confusing and conflates information on two
    separate 1115 demonstrations for Wisconsin-- it does not clearly
    identify which demonstration is being discussed. Wisconsin was required
    to return $10.2 million for exceeding spending limits for BadgerCare,
    while the prior 2004 GAO report referenced in the new draft report had
    criticized CMS' approach to budget neutrality for SeniorCare (a
    demonstration that focused on providing drug coverage to low-income
    seniors and which was implemented before the advent of Medicare Part
    D). HHS appreciates the notation on the 2007 return of $10.2 million to
    the Federal Government because the State exceeded spending limits for
    BadgerCare; this appropriately acknowledges that HHS takes seriously
    its fiduciary responsibility to the Federal taxpayer. We further note
    that with respect to SeniorCare, HHS was prepared to terminate it for
    failing to remain within approved spending limits. Despite the HHS
    position, Congress elected to extend the demonstration via legislative
    action.

    * Also in footnote 32, it is important to note that the collection of
    funds from Wisconsin for BadgerCare pre-dates the 2006 Program
    Assessment Rating Tool activity. Wisconsin had its second renewal
    during 2007; the collection of funds was an HHS-imposed requirement of
    the previous renewal.

    Attachment 1:

    In response to the draft 2004 report, CMS concurred with the
    recommendation that "CMS establish uniform guidance for states, which
    would set forth acceptable methods to calculate their UPLs." However,
    CMS specifically indicated in our response that we "did not necessarily
    agree with the GAO's definition of a reasonable estimate of the UPL"
    and we did not "believe that an extensive laundry list of acceptable
    methods could be compiled that would address every payment methodology
    to every provider in every State." Moreover, the GAO's recommendation
    in the February 2004 report addressed the need for guidance on the
    "methodologies" to calculate UPLs, not on the data sources utilized by
    States. Technical comments included in CMS' response to the 2004 draft
    report, which are conveniently "not printed" by the GAO in the February
    2004 report, specifically challenged the GAO's suggestion that a
    methodology requiring a demonstration of a "reasonable estimate" should
    rely on precise data sources. When calculating UPLs, States arc
    estimating what Medicare would pay for similar services provided to
    Medicaid patients and States are required to perform such
    demonstrations on a prospective basis. The precision to which the GAO
    suggested States should calculate their UPLs was merely based on the
    ability of the GAO to spend a year and a half reviewing calculations
    from prior periods. This luxury does not exist for CMS and the States
    due to the State plan amendment effective date requirements and State
    budgeting processes.

    The CMS has addressed proper UPL methodological demonstrations in 2
    ways under the Medicaid State plan amendment review process, processes
    of which were recognized by the GAO in the February 2004 report.
    Specifically, CMS requires (as part of the five standard funding
    questions) States to provide a UPL demonstration from all States
    proposing to increase Medicaid reimbursements. During the State plan
    amendment review process, CMS evaluates the reasonableness of a States
    UPL methodology but CMS does not validate the data sources utilized by
    the States. It is unreasonable to suggest that CMS validate the data
    sources of a prospective State estimate. CMS has not generally
    challenged data sources utilized by States to perform UPL
    demonstrations and the GAO's February 2004 report does not specifically
    recommend such a requirement. CMS also requires States to identify the
    sources of the non- Federal share of Medicaid payments under the
    Medicaid State plan amendment review process, which has significantly
    reduced State interest in maximizing UPL demonstrations. Specifically,
    many States making supplemental Medicaid payments were not allowing the
    health care providers to retain the Medicaid supplemental payments to
    which they were entitled. Therefore, States enjoyed a significant
    incentive to maximize the UPL demonstrations. However, as CMS required
    States to terminate such financing practices. States have demonstrated
    little interest in pursuing aggressive UPLs.

    Again, CMS appreciates the opportunity to review and comment on the
    draft report.

    The following are GAO's comments to certain concerns raised in HHS's
    letter dated December 21, 2007.

    GAO Comments:

    1. We refer to our 2004 report because of the significant role
    supplemental payments play in Florida's demonstration and our concern
    that HHS did not require the state to correct known problems with these
    supplemental payments before establishing a spending limit on the basis
    of historical payments. HHS stated that we did not address financing
    arrangements in our 2004 report, but we disagree. An objective of the
    2004 report was to determine if HHS's continuing oversight of
    supplemental payment arrangements was sufficient to ensure that claims
    submitted by states were calculated appropriately and complied with
    Medicaid requirements. Although we noted that HHS had taken a number of
    steps to strengthen its oversight of these payment arrangements, we
    found that HHS had not issued guidance for states' use on appropriate
    methods for calculating their Medicaid Upper Payment Limit (UPL). We
    recommended that HHS establish uniform guidance that would set forth to
    states acceptable methods for calculating the UPL. Our concern in this
    report is that HHS approved a spending limit for Florida's low income
    pool based on the state's UPL without first requiring Florida to
    address problems HHS identified in Florida's methodology for
    calculating this UPL.

    We disagree that the draft of this report erroneously suggested that
    Medicaid payment limits necessarily result in proper sources of state
    financing. As noted in the draft, we are concerned that HHS approved a
    spending limit for the low-income pool based on potentially inflated
    historical payments. Our draft report credited HHS for requiring
    Florida to correct the issue the department had identified with the
    source of the state's financing.

    2. We disagree with HHS's characterization of the findings from our
    2006 and 2007 reports. Although our 2006 and 2007 reports addressed HHS
    oversight of Medicaid and discussed agency actions to strengthen
    oversight, certain of the findings of these earlier reports resonate
    with our current findings. In 2007, for example, we found HHS review
    and approval of state plan amendments to be marked by a lack of
    transparency and clear guidance. And in 2006, although we noted recent
    improvements in the financial management processes HHS uses in its
    oversight of states, we found it too soon to assess their impact, and
    further noted additional weaknesses that HHS had not addressed.

    3. As discussed in the draft report, we are concerned that HHS allowed
    Vermont to seek reimbursement for administrative costs higher than that
    of other public health entities, and that HHS agreed to reimburse
    Vermont for a larger portion of these administrative costs than
    typically afforded other states. We disagree that HHS transparently
    identified costs for which federal reimbursement of excess revenues
    from the public managed care organization are available. As noted in
    the report, the purposes for which Vermont may spend these excess
    revenues are governed only by a set of broad health objectives. For
    example, HHS allowed Vermont to spend excess revenues on expenditures
    that increase access to quality health care for Medicaid enrollees and
    those lacking adequate insurance and that improve health outcomes and
    quality of life for Medicaid-eligible individuals.

    4. Our draft report recognized HHS's discretion in making adjustments
    in the spending limits. For example, we accepted a projected $2.1
    billion in adjustments to the spending limits for Florida and Vermont
    because these adjustments were supported by quantified explanations. As
    noted in the draft, seemingly small changes to per person cost growth
    rates are amplified by the high volume of beneficiaries that access
    Medicaid services and the number of years across which these cost
    growth rates are applied. As noted in the draft, the seemingly small
    changes to the growth rates in Florida and Vermont resulted in nearly
    $7.2 billion that we identified as not budget neutral.

    5. As noted in the draft report, the established agreement did limit
    how Medicaid spending in Florida could grow in the future. Our concern,
    however, is that these spending limits are not budget neutral.
    Furthermore, we disagree with HHS's assertion that Florida's spending
    limits reflect projected future growth in the absence of the
    demonstration. For example, over $5.5 billion in projected spending we
    identified as not budget neutral stems from an adjustment to reflect in
    part what the state projected would be higher anticipated costs of
    delivering Medicaid services in a managed care environment. These costs
    would not be incurred absent the demonstration, and as noted in the
    draft report, absent evidence supporting the approved changes to
    benchmark amounts, HHS should not have allowed them as a consideration
    in establishing a higher spending limit for the demonstration.

    We also disagree that HHS capped Medicaid program growth in Florida.
    The agency approved per person spending limits rather than a total
    limit on programmatic spending. Thus Medicaid spending in Florida may
    grow by more or less than 13 percent per year depending on enrollment
    in the program.

    6. We believe the spending limit HHS approved for Florida's low-income
    pool was problematic because HHS did not require Florida to correct
    known deficiencies in the state's method for calculating historical
    supplemental payments that served as the basis for the spending limit.
    We did not estimate how the low-income pool should have been adjusted
    because HHS's September 2005 review--which identified the problems with
    Florida's calculation of its financing arrangement--did not estimate
    the actual allowable payments under the program or the extent that the
    prior supplemental payment arrangement was considered excessive or
    inflated. Consequently, we did not have the information available to us
    that would allow a detailed estimate of how the low-income pool
    spending limit should be adjusted. We believe that the concerns raised
    by HHS's own review should have been addressed prior to establishing a
    spending limit based on historical spending. As noted in the draft
    report, HHS should ensure that the level of supplemental payments for
    which Florida could have obtained federal Medicaid funds in the absence
    of the demonstration is calculated accurately, and adjust the approved
    spending limit accordingly.

    7. By not requiring Florida to correct known deficiencies in the
    state's historical spending, we believe HHS did not ensure the fiscal
    integrity of Florida's low-income pool. In the draft report we credited
    HHS for requiring Florida to correct a problem the department
    identified with the manner in which Florida used local financing as the
    nonfederal share of its supplemental payments. Our concern remains,
    however, that HHS did not require Florida to correct a separate problem
    the department identified in the methods and data by which the state
    calculated the amount of supplemental payments eligible for federal
    matching funds under its program. By not requiring Florida to correct
    its method and data sources as a condition of approving the
    demonstration, HHS approved a spending limit for the low-income pool
    based on potentially inflated historical spending.

    8. We believe that we accurately characterized Florida's low-income
    pool in this report. We agree that Florida discontinued its inpatient
    supplemental payment UPL program as a condition of the demonstration,
    and have clarified the language to indicate that HHS allowed Florida to
    develop the low-income pool in order to continue funding for a program
    of supplemental payments to providers.

    9. HHS's estimation of the maximum amount Florida could have spent
    under its UPL is irrelevant to the discussion of the appropriate
    spending limit for the low-income pool. As we stated in the draft
    report, consistent with HHS policy, spending limits should be based on
    actual historical spending and quantified explanations for trend
    anomalies. We believe that, in the absence of reliable historical data,
    spending limits should be based on transparent, clearly articulated
    methodologies. Our concern is that HHS allowed Florida to base this
    spending limit on potentially inflated historical payments as a result
    of the state's flawed methodology for calculating its UPL.

    10. HHS's efforts to limit and document Florida's Medicaid state plan
    spending and low-income pool spending under the demonstration do not
    speak to the extent to which HHS ensured the fiscal integrity and
    budget neutrality of the state's proposed demonstration prior to
    approving it. We are concerned that HHS approved growth rates for the
    demonstration without adequate support and did not require Florida to
    correct problems the department identified in the state's methodology
    for calculating its UPL.

    11. To ensure that the spending limit on Florida's low-income pool is
    budget neutral and based on allowable historical spending, we believe
    that HHS should require Florida to correct problems the agency
    identified in Florida's methodology for calculating its UPL and adjust
    the spending limit for future payments made under the low-income pool
    accordingly. We are not suggesting a retroactive adjustment to the
    spending under the supplemental payment program. This recommendation is
    consistent with our long-standing conclusions that spending limits for
    proposed demonstrations should be based on valid methods.

    12. We characterize accumulated savings from an expired demonstration
    in Vermont as hypothetical because they do not represent actual
    expenditures incurred during the historical period HHS reviewed in
    approving a new demonstration in Vermont. We do not object to
    consideration of actual expenditures from a predecessor demonstration
    in determining a spending limit for a new demonstration. But according
    to HHS's written budget neutrality guidance, surpluses generated early
    in the life of the expired demonstration would not have been available
    to Vermont in the absence of a new demonstration.

    13. During the course of our review of the Vermont demonstration, we
    considered the statutory provisions cited by HHS, and nonetheless, as
    indicated in the July 2007 letter,[Footnote 55] had concerns about the
    consistency of the Vermont demonstration with federal law.

    14. Our discussion and use of enrollment growth benchmarks reflect
    HHS's description of its policy, as written in guidance and as
    described by officials. During the course of our work, HHS officials
    told us that they considered benchmarks of enrollment growth in
    determining an aggregate spending limit for the Vermont demonstration.
    Yet HHS approved enrollment growth rates for the demonstration equal
    to, and in some cases exceeding, the highest rates HHS considered. Our
    main concern is that HHS's basis for approving these enrollment growth
    rates was not well documented. We believe that to maintain
    accountability and transparency in the Medicaid program, the
    Secretary's approvals should be based on clearly articulated policies
    and spending limits that are consistent with these policies.

    [End of section]

    Appendix III: Comments from the State of Florida:

    Florida Medicaid:
    2727 Mahan Drive, MS #8:
    Tallahasse, Florida 32308:
    Visit AHCA online at [hyperlink, http://ahca.myflorida.com]:

    Charlie Crist:
    Governor:

    Andrew C. Agwunobi, M.D.:
    Secretary:

    November 30, 2007:

    Dr. Marjorie Kanof:
    Health Care Managing Director:
    United States Government Accountability Office:
    441 G Street, NorthWest:
    Washington, DC 20548:

    Dear Dr. Kanof:

    Thank you for providing the Agency for Health Care Administration, the
    single state agency for administering the Florida Medicaid program,
    with the opportunity to comment on the draft report entitled Medicaid
    Demonstration Waivers: Recent HHS Approvals Continue to Raise Cost and
    Oversight Concerns (GAO-08-87).

    As provided under Section 1115 of the Social Security Act, the
    Secretary for Health and Human Services has broad authority to grant
    waivers of statutory provisions to implement experimental, pilot, or
    other demonstration projects with the goal to assist in promoting the
    objectives of the Medicaid statute. Florida was granted such a waiver
    in order to implement our state legislated reform project in October
    2005. The draft report focuses on recent waivers approved in Florida
    and Vermont, and examines the extent to which the Department of Health
    and Human Services ensured, before approving them, that the
    comprehensive 1115 demonstration waivers will: (a) be budget neutral to
    the federal government; and (b) maintain Medicaid's fiscal integrity.

    We support the Government Accountability Office's (GAO's) efforts to
    evaluate Florida's Medicaid Reform effort and analyze the above issues.
    Florida understands the need to carefully monitor the impact of our
    demonstration in meeting the established goals. Find below our comments
    on the draft report.

    General Comment:

    * During the negotiations of the demonstration waiver, Florida worked
    closely with the Centers for Medicare and Medicaid Services (CMS) to
    ensure that all data and documentation were provided in a timely and
    accurate manner to support our waiver application.

    Budget Neutrality:

    * On page 12, Florida recommends the term "maintenance-of-effort
    requirement" be clarified in footnote #23 to avoid the misperception
    that something was missing from the special terms and conditions of the
    1115 demonstration waiver. Per discussions with CMS, Florida was not
    expanding the population subject to managed care and therefore was not
    required to include this requirement as a part of the special terms and
    conditions. Through previous managed care efforts, Florida satisfied
    the maintenance- of-effort requirement.

    Budget Neutrality:

    * On page 18, we recommend reformatting 'b' in alignment with the table
    on page 17 in order to provide a better flow of the table and the
    references.

    Low Income Pool:

    * On page 28, the report states, "In November 2006, HHS officials said
    that the problems identified with the improper calculation of states'
    allowed supplemental payment amounts would be corrected at a later
    date." This statement is linked to footnote #48 which is located on
    page 29. The footnote indicates that correcting this problem in the
    case of Florida was unnecessary. Prior to and during negotiations for
    the demonstration waiver, Florida worked closely with CMS to resolve
    any concerns.

    Again, we appreciate the opportunity to provide comments on your draft
    report. Should you have any questions about our comments, please
    contact me at (850) 488-3560.

    Sincerely,

    Signed by:

    Thomas W. Arnold
    Deputy Secretary for Medicaid TWA/lam:

    cc: Mr. Mark Thomas, Chief of Staff Mr. Clint Fuhrman, Deputy Secretary
    for Communications and Legislative Affairs:

    [End of section]

    Appendix IV Comments from the State of Vermont:

    State of Vermont:
    Agency of Human Services:
    Office of the Secretary:
    [phone] 802-241-2220:
    [fax] 802-241-2979:
    103 South Main Street:
    Waterbury, VT 05671-0204:
    [hyperlink, http://www.ahs.state.vt.us]:

    November 20, 2007:

    Marjorie Kanof, MD
    Managing Director, Health Care:
    United States Government Accountability Office:
    441 G Street, NW:
    Room 5A21:
    Washington, DC 20548:

    Dear Dr. Kanof:

    Thank you for the opportunity to review a copy of your proposed report
    entitled Medicaid Demonstration Waivers: Recent HHS Approvals Continue
    to Raise Cost and Oversight Concerns (GAO-08-87).

    As you are aware, the nation faces a massive challenge related to
    health care. Public spending for health care continues to escalate;
    meanwhile, 47 million Americans lack basic health care coverage. The
    debate regarding how to address the health care crisis will continue at
    both the state and federal levels.

    In Vermont, our Governor and Legislature recognized that the
    traditional approach for funding health care services was not
    financially sustainable. Absent meaningful reform, Vermont would
    continue to spend a greater percentage of its budget on health care
    with little or no opportunity to enhance access to health care or
    improve the Vermont health care delivery system.

    Section 1115 of the Social Security Act provides the Secretary of the
    US Department of Health and Human Services with authority to grant
    state Medicaid programs the flexibility to pursue alternative
    approaches to meet the objectives of the Medicaid program. In light of
    challenges related to Medicaid at the federal level, we appreciate the
    Secretary's willingness to partner with Vermont by granting us the
    authority to pursue meaningful reform.

    In exchange for the flexibility granted by the Secretary, the State of
    Vermont assumed an unprecedented amount of risk related to program
    expenditures. Federal spending for the vast majority of Vermont's
    Medicaid program is capped at an aggregate level over the course of the
    five-year demonstration.

    The State of Vermont's Administration and Legislature undertook an
    extensive review and analysis of spending projections and the proposed
    five-year spending limit for Global Commitment. Based on historical
    Medicaid growth rates in Vermont, Vermont program expenditures would
    exceed the aggregate spending cap established for the Global Commitment
    Demonstration. In the end, Vermont policymakers concluded that
    "business as usual" was not financially sustainable. Policymakers
    determined that the flexibility granted under the Demonstration would
    permit Vermont to engage in true reform and control program growth. By
    controlling program growth, Vermont's program would become financially
    sustainable and remain within the Demonstration's aggregate spending
    limit.

    Vermont's Demonstration, the Global Commitment to Health, is premised
    on three basic objectives: 1) enhance access to health care services;
    2) improve quality of health care; and 3) contain program costs. We
    believe these objectives are consistent with federal Medicaid policy
    and the goals of many other states. We believe that Vermont's
    experience will be a valuable resource for evaluating strategies for
    program reform throughout the country.

    We have reviewed the draft report and understand that GAO has two
    primary findings related to the Vermont demonstration. GAO asserts that
    HHS did not adequately ensure that Vermont's Demonstration: a) will be
    budget neutral to the federal government; and b) maintains the fiscal
    integrity of the Medicaid program.

    While we do not believe we are in a position to comment on whether HHS
    adhered to its policies and procedures, we would like to briefly share
    our experience in working with HHS and its federal partners.

    State staff and federal staff engaged in extensive discussion and
    analysis of Vermont's historical expenditures, cost trends, caseload
    trends and program policies over the course of several months. These
    activities lead to the final budget neutrality limit established by HHS
    and accepted by Vermont. The process was both iterative and rigorous.
    Many of these discussions included staff from CMS Central Office, CMS
    Region I and the Office of Management and Budget. The discussions
    included detailed reviews of financial models, ad hoc claims analyses,
    trends analyses, and program spending reports.

    As indicated previously in this letter, Vermont's decision to accept
    the aggregate budget neutrality limit was not an easy one and carried
    with it significant risk. The budget neutrality limit requires Vermont
    to implement reform strategies that enable it to stay within the
    specified spending limit.

    Additionally, the draft GAO report acknowledges that the rates paid by
    the Single State Agency to the public MCO. must be actuarially
    certified. The independent actuary established payment rates using the
    same actuarial principles used to establish payment rates for Medicaid
    MCOs throughout the country. The rates are based on historical program
    expenditures and include only those services that are eligible for
    Medicaid coverage. We believe this requirement in the Demonstration's
    Special Terms and Conditions is one example of HHS's approach to
    maintaining the fiscal integrity of the Medicaid program.

    We identified technical issues related to the draft report that you may
    want to consider as you finalize the report. These issues are listed
    below:

    1. The opening section of the "Highlights" indicates that GAO found
    that "HHS did not adequately ensure that Florida's and Vermont's
    demonstrations will be budget neutral to the federal government." If
    GAO's finding is that HHS did not adhere to its internal policies for
    determining budget neutrality, it does not follow that the HHS did not
    ensure that the program will be budget neutral to the federal
    government. Absent entering into a demonstration agreement, spending
    growth is not limited to "benchmark" growth rates. Arguably, state-
    specific growth rates are a more accurate predictor of future growth
    trends within a particular state. If growth rates used to establish the
    Demonstration's expenditure ceiling are below state-specific experience
    (even if these growth rates are above the "benchmarks"), aggregate
    spending likely has been held to a lower level than would have been
    spent absent the demonstration.

    2. The "Highlights" section also indicates that "HHS agreed to
    reimburse Vermont for the administration of its public managed care
    program at a rate higher than what the state received prior to its
    demonstration." We do not believe that this is accurate. The
    independent actuary relied on Vermont Medicaid's historical
    administrative expenditures in developing this component of the
    capitation rate. Second, the federal matching rate for payments to MCOs
    and the historical matching rates for administrative expenses in
    Vermont are very similar (approximately 60 percent). It also is worth
    pointing out that the Special Terms and Conditions require the public
    MCO to adhere to nearly all of the federal requirements that apply to
    private Medicaid MCOs. This requirement has resulted in the need to
    invest additional resources in the public MCO in order to meet federal
    managed care requirements. (This finding is repeated on Pages 6 and 30
    and we believe it should be revised.)

    3. On Page 28 of the draft report, GAO indicates that the demonstration
    enables the state to use federal matching funds to pay for programs
    previously funded by the state. We believe this section should be
    clarified to indicate that Federal matching funds are used to make
    capitation payments to the public MCO. Under the Global Commitment
    Demonstration, the public MCO receives an actuarially-certified,
    capitated payment in exchange for its commitment to provide all covered
    services to enrolled members. If the MCO incurs expenses in excess of
    its capitation revenues, then state-only dollars or MCO reserves will
    be used to reimburse covered services. Conversely, if the public MCO is
    able to manage service utilization through its program reform efforts,
    it will have excess revenues available to put into reserves or invest
    in the health care system. Unlike private Medicaid MCOs, the public MCO
    is restricted in how it can use excess capitation revenues. Pursuant to
    the Special Terms and Conditions, excess capitation revenues may only
    be used for specific, broad health objectives, as delineated on Page 29
    of the draft GAO report. Essentially, the public MCO is required to re-
    invest savings into the Vermont health care system, benefiting
    Demonstration enrollees, uninsured Vermonters and the overall health
    care delivery system.

    In summary, we believe the Vermont Global Commitment to Health
    Demonstration design is innovative and intended to address the
    challenges of public health care financing. We understand that true
    reform requires us to examine and evaluate program objectives broadly
    and outside the framework of traditional program policies and
    management methods. We believe the Demonstration's flexibility will
    enable Vermont to strengthen its health care delivery system while
    controlling program expenditures.

    We appreciate the opportunity to provide comment regarding the draft
    report. Please feel free to contact me if you would like to discuss any
    of our comments.

    Sincerely,

    Signed by:

    Cynthia D. LaWare, Secretary:
    Agency of Human Services:

    cc: Joshua Slen, Director, OVHA:
    Suzanne Santarcangelo, AHS:

    [End of section]

    Appendix V: GAO Contact and Staff Acknowledgments:

    GAO Contact:

    Marjorie E. Kanof, (202) 512-7114 or kanofm@gao.gov:

    Acknowledgments:

    In addition to the contact named above, Katherine M. Iritani, Assistant
    Director; Kathryn Allen; Ted Burik; Tim Bushfield; Helen Desaulniers;
    Tom Moscovitch; Hemi Tewarson; Terry Saiki; Stan Stenersen; and
    Jennifer Whitworth made key contributions to this report.

    [End of section]

    Related GAO Products:

    Medicaid Demonstration Waivers: Lack of Opportunity for Public Input
    during Federal Approval Process Still a Concern. GAO-07-694R.
    Washington, D.C.: July 24, 2007.

    Medicaid Demonstration Projects in Florida and Vermont Approved Under
    Section 1115 of the Social Security Act. B-309734. Washington, D.C.:
    July 24, 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 Waivers: HHS Approvals of Pharmacy Plus Demonstrations
    Continue to Raise Cost and Oversight Concerns. GAO-04-480. Washington,
    D.C.: June 30, 2004.

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

    SCHIP: HHS Continues to Approve Waivers That Are Inconsistent with
    Program Goals. GAO-04-166R. Washington, D.C.: January 5, 2004.

    Medicaid and SCHIP: Recent HHS Approvals of Demonstration Waiver
    Projects Raise Concerns. GAO-02-817. Washington, D.C.: July 12, 2002.

    Medicare and Medicaid: Implementing State Demonstrations for Dual
    Eligibles Has Proven Challenging. GAO/HEHS-00-94. Washington, D.C.:
    August 18, 2000.

    Medicaid Section 1115 Waivers: Flexible Approach to Approving
    Demonstrations Could Increase Federal Costs. GAO/HEHS-96-44.
    Washington, D.C.: November 8, 1995.

    Medicaid: Statewide Section 1115 Demonstrations' Impact on Eligibility,
    Service Delivery, and Program Cost. GAO/T-HEHS-95-182. Washington,
    D.C.: June 21, 1995.

    [End of section]

    Footnotes:

    [1] Each of the 50 states and the District of Columbia, Puerto Rico,
    and four U.S. territories have Medicaid programs.

    [2] Under federal law, the states and federal government share in
    Medicaid expenditures according to a formula that provides a more
    generous federal match for states in which per capita income is lower.
    See Social Security Act � 1905(b) (codified, as amended, at 42 U.S.C. �
    1396d(b) (2000)).

    [3] Although the Secretary of HHS has delegated the administration of
    the Medicaid program, including the approval of section 1115
    demonstrations, to the Centers for Medicare & Medicaid Services (CMS),
    we refer to HHS throughout this report because section 1115
    demonstration authority ultimately resides with the Secretary and,
    accordingly, other HHS offices and agencies are involved in the review
    and approval of these demonstrations. A federal review team, including
    officials from the Office of Management and Budget, HHS's Assistant
    Secretary of Planning and Evaluation, and HHS's Health Resources and
    Services Administration, assists CMS by reviewing and commenting on
    states' proposed demonstrations.

    [4] Budget neutrality is a requirement in place through HHS policy but
    is not a statutory requirement for Medicaid demonstrations.

    [5] HHS officials consider spending limits to be a product of
    negotiations that are informed by HHS's policy to consider the state's
    historical experience and projections of growth in the President's
    Budget. HHS's benchmarks are contained in HHS's budget neutrality
    policy as described for section 1115 demonstration proposals under the
    Health Insurance Flexibility and Accountability (HIFA) initiative. HHS
    considers this policy to be applicable for all section 1115
    demonstration proposals.

    [6] A list of related GAO reports appears at the end of this report.

    [7] For more information on inappropriate supplemental payment
    arrangements, see GAO, Medicaid: Improved Federal Oversight of State
    Financing Schemes Is Needed, GAO-04-228 (Washington, D.C.: Feb. 13,
    2004).

    [8] GAO, High-Risk Series: An Update, GAO-07-310 (Washington, D.C.:
    January 2007).

    [9] Section 1115 demonstrations vary in scope, from targeted
    demonstrations limited to specific services or populations, to
    comprehensive demonstrations affecting Medicaid populations and
    services throughout a state and including most of a state's Medicaid
    expenditures. We reviewed demonstrations that were comprehensive in
    scope. For the purpose of our work, we defined comprehensive 1115
    Medicaid demonstrations as those that (1) affect beneficiaries
    statewide, (2) cover a broad range of services, and (3) include most of
    a state's Medicaid expenditures. We did not consider to be
    comprehensive demonstrations that target specific populations or
    account for a small portion of a state's total Medicaid spending. We
    also limited our review to demonstrations approved from July 2004 (when
    we last reviewed HHS-approved section 1115 demonstrations) through
    December 2006.

    [10] For example, certain beneficiaries in Florida have more options in
    selecting health care plans and benefits, but bear increased
    responsibility for ensuring that their chosen plans maintain the
    benefits and services that meet their needs; beneficiaries in Vermont
    may have their covered benefit packages increased or decreased, which
    the state can do within certain limits without prior approval from HHS.
    HHS did not provide for public input to the demonstration proposals at
    the federal level (to HHS) before approving them. See GAO, Medicaid
    Demonstration Waivers: Lack of Opportunity for Public Input during
    Federal Approval Process Still a Concern, GAO-07-694R (Washington,
    D.C.: July 24, 2007).

    [11] GAO, Medicaid Demonstration Projects in Florida and Vermont
    Approved Under Section 1115 of the Social Security Act, B-309734
    (Washington, D.C.: July 24, 2007).

    [12] We considered an explanation to be quantified in support of higher
    growth if the explanation corrected a verifiable anomaly in either the
    state's historical data or nationwide estimates of Medicaid growth.

    [13] Florida estimated this amount based on applying the agreed-upon
    limit for per person spending under the demonstration to the state's
    projected enrollment over the duration of the demonstration.

    [14] We use the term excess revenue to refer to funds remaining after
    the managed care organization has paid necessary medical and
    administrative expenses; excess revenue has also been referred to as
    savings in past reports.

    [15] See B-309734, July 24, 2007.

    [16] See Social Security Act �� 1903(a)(1), 1905(b) (codified, as
    amended, at 42 U.S.C. �� 1396b(a)(1), 1396d(b)). States with lower per
    capita income typically receive higher federal matching shares.

    [17] A state Medicaid plan details the populations a state's program
    serves; the amount, scope, and duration of the mandatory and optional
    services the program covers; and the rates of and methods for
    calculating payments to providers.

    [18] Section 1115 allows waivers of requirements in Medicaid and
    several other programs authorized under the Social Security Act. See
    Social Security Act � 1115 (codified, as amended, at 42 U.S.C. � 1315);
    see also section 2107(e) of the act (codified, as amended, at 42 U.S.C.
    � 1397gg(e)) regarding the applicability of section 1115 to the State
    Children's Health Insurance Program.

    [19] HHS policy identifies three general categories of beneficiaries
    that can be included in section 1115 demonstrations: (1) mandatory
    populations, referring to beneficiaries who must be covered under a
    Medicaid state plan; (2) optional populations, referring to
    beneficiaries who can be covered under a state plan, regardless of
    whether they are covered at the time the demonstration is approved; and
    (3) expansion populations, referring to beneficiaries who cannot be
    covered under a Medicaid or SCHIP state plan, and who can only be
    covered through the Secretary's authority under section 1115.

    [20] HHS considers this guidance to apply to proposed section 1115
    demonstrations. The guidance was originally published for section 1115
    demonstrations under the HIFA initiative. HIFA section 1115
    demonstrations are intended to utilize private health insurance
    coverage options to provide coverage to more people. According to HIFA
    guidance, HHS policy is to apply the lower of state-specific
    experience--using 5 years of Medicaid data--or the President's Budget
    Medicaid baseline for the eligible groups covered by the demonstration.

    [21] Managed care organizations can reduce costs by relying on a
    primary care physician who acts as a gatekeeper for obtaining other
    health services, such as hospital or specialty medical care.

    [22] The special terms and conditions for the approved demonstrations
    in Florida and Vermont do not include a specific maintenance-of-effort
    requirement. For certain 1115 demonstration initiatives such as HIFA,
    HHS policy has not permitted states to receive additional federal
    matching payments for previously state-only heath service programs
    under the demonstrations. Federal financial participation could not be
    claimed for any existing state-funded program because, for example, the
    expectation was that the state would expand benefits through the
    demonstration. This requirement was called maintenance of effort.

    [23] Florida's demonstration also includes (1) choice counselors to
    help beneficiaries make informed decisions when selecting a Medicaid
    reform health plan, (2) a program of enhanced benefits to promote and
    reward healthy behaviors, and (3) a provision allowing Medicaid
    beneficiaries to voluntarily "opt out" of Medicaid coverage altogether
    and use a state-paid Medicaid premium toward their costs to enroll in
    an employer-sponsored insurance plan or in a commercial insurance plan
    if they are self-employed.

    [24] According to Florida officials, statewide implementation of the
    demonstration is subject to approval by the Florida State Legislature.

    [25] Florida law made the state's authority for pursuing the proposed
    demonstration contingent in part on federal approval to preserve the
    upper payment limit funding mechanism (the supplemental payment
    arrangement). Fla. Stat. Ann. � 409.91211(1)(b).

    [26] Populations not covered by the state managed care organization
    include individuals enrolled in the state's long-term care
    demonstration and SCHIP.

    [27] To receive the federal share for capitation payments made to a
    managed care organization, a state is required to enter into a contract
    with a managed care organization. See Social Security Act �
    1903(m)(2)(A)(i)(codified, as amended, at 42 U.S.C. �
    1396b(m)(2)(A)(i)). HHS approved the agreement between the Vermont
    Medicaid agency and its Office of Vermont Health Access as such a
    contract.

    [28] Vermont is also allowed to change the covered benefit package
    offered to certain groups of beneficiaries, such as nonmandatory groups
    that previously received Medicaid coverage at the state's option,
    without additional HHS approval as long as the changes result in no
    more than a 5 percent increase or decrease each year from the prior
    year's total Medicaid expenditures.

    [29] GAO, Medicaid Section 1115 Waivers: Flexible Approach to Approving
    Demonstrations Could Increase Federal Costs, GAO/HEHS-96-44
    (Washington, D.C.: Nov. 8, 1995).

    [30] GAO, Medicaid and SCHIP: Recent HHS Approvals of Demonstration
    Waiver Projects Raise Concerns, GAO-02-817 (Washington, D.C.: July 12,
    2002).

    [31] In 2006, HHS developed a plan intended to mitigate federal risk
    with respect to budget neutrality of section 1115 demonstrations, once
    approved. This plan includes HHS reviews of spending under the approved
    demonstrations to ensure that the spending complies with the
    predetermined spending ceilings that HHS approved. OMB incorporated
    these reviews as a performance metric in its 2006 assessment of
    Medicaid under the Program Assessment Rating Tool. In 2007, HHS
    required Wisconsin to return $10.2 million to the federal government
    after notifying the state that it had exceeded spending limits for its
    previously approved section 1115 demonstration.

    [32] GAO, Medicaid Waivers: HHS Approvals of Pharmacy Plus
    Demonstrations Continue to Raise Cost and Oversight Concerns GAO-04-480
    (Washington, D.C.: June 30, 2004).

    [33] See GAO-04-228.

    [34] The UPL is based on how much Medicare, the federal government's
    health care program for seniors and some disabled people, would pay for
    comparable services.

    [35] In Florida, HHS approved annual per person limits--or "per capita
    caps"--on federal Medicaid funds for services to groups of
    beneficiaries, rather than an aggregate spending limit such as
    Vermont's. Under this type of limit, spending is limited for costs per
    person, but a state does not have to accept financial risk for
    unexpected growth in enrollment. For purposes of demonstrating budget
    neutrality, Florida calculated its estimated overall spending limit by
    multiplying its per person limits by projected enrollment.

    [36] Seemingly small changes to per person cost growth rates are
    amplified by the high volume of beneficiaries that access Medicaid
    services and the number of years across which these cost growth rates
    are applied. For example, a 1 percent decrease in the per person cost
    growth rate for Florida's aged, blind, and disabled beneficiaries
    reduces projected spending under the demonstration by $879 million over
    5 years; a 1 percent decrease in the per person cost growth rate for
    families and children reduces projected spending under the
    demonstration by $1.4 billion over 5 years.

    [37] Aged, blind, and disabled beneficiaries make up a much smaller
    percentage of Florida's Medicaid population than do Medicaid-eligible
    families and children. Data provided to HHS by Florida indicate that in
    state fiscal year 2004, for example, Florida attributed about 16
    percent of Medicaid enrollment among those groups included in the
    proposed demonstration to aged, blind, and disabled beneficiaries and
    about 84 percent to families and children.

    [38] Specifically, HHS officials removed annual growth for one year in
    which per person costs decreased (-1.4 percent growth), and replaced it
    with annual growth based on the average growth from two surrounding
    years (7.9 percent growth).

    [39] Specifically, HHS's guidance says that states, in supporting
    budget neutrality, should submit to HHS 5 years of historical data and
    that spending limits are based on growth rates that are the lower of
    state-specific history or estimates of nationwide growth for the
    beneficiary groups in the demonstration. However, HHS's guidance does
    not specifically define state-specific historical rates as calculated
    over 5 years.

    [40] In addition, HHS required Vermont to remove the projected costs
    for certain populations from an ongoing section 1115 demonstration.
    Vermont will be at risk for the cost of these populations.

    [41] The state initially proposed including in the demonstration all
    beneficiaries statewide, including beneficiary groups from several
    other demonstrations and SCHIP. HHS required Vermont to continue to
    operate a long-term care demonstration and SCHIP independent of the
    proposed demonstration, and to remove those beneficiary groups from its
    spending base. On the other hand, HHS allowed Vermont to include
    beneficiaries from a demonstration that provided services to people
    with developmental disabilities as well as certain beneficiary groups
    from an ongoing section 1115 demonstration.

    [42] As with Florida, changes in growth rates are amplified by the
    number of beneficiaries accessing Medicaid services and the number of
    years across which these growth rates are applied. For example,
    reducing the enrollment growth rate for families and children from 1.99
    percent to the benchmark level of 1.05 percent reduces Vermont's
    spending limit by more $32 million over 5 years.

    [43] See GAO-02-817.

    [44] Under the demonstration, funds from the low-income pool may be
    used for health care expenditures (medical care costs or premiums)
    incurred by "the State, by hospitals, clinics, or by other provider
    types for uncompensated medical care costs of medical services for the
    uninsured, Medicaid shortfall. . . and may include premium payments,
    payments for provider access systems (PAS) and insurance products for
    such services provided to otherwise uninsured individuals, as agreed
    upon by the State and CMS."

    [45] These reviews were conducted by HHS funding specialists hired in
    2004 and 2005 and resulted in a product known as a state funding
    profile. The funding profile documents the state Medicaid program's
    organizational structure, programmatic structure, and budget process
    and is made available to HHS staff for oversight and informational
    purposes. According to HHS, the funding specialists are hired using
    Health Care Fraud and Abuse Control Program funds.

    [46] Section 118 of the Special Terms and Conditions governing
    Florida's demonstration allows HHS to adjust the spending limit under
    several circumstances. Specifically, "The CMS reserves the right to
    adjust the budget neutrality ceiling to be consistent with enforcement
    of impermissible provider payments, health care related taxes, new
    Federal statutes, or policy interpretations implemented through SMD
    [state Medicaid director] letters, other memoranda on or regulations."

    [47] Over the course of the 5-year demonstration, we estimated that
    excess administrative reimbursement could total up to $71 million in
    part because Vermont was allowed under the demonstration to receive a
    higher-than-traditional administrative reimbursement level. Under
    traditional administrative claiming, Vermont would receive about $157
    million based on $4.3 billion in payments to the managed care
    organization (assuming 7.3 percent administrative claims matched at 50
    percent). Under the terms of its demonstration, Vermont could claim as
    much as $228 million (assuming 9 percent administrative claims matched
    at 58.93 percent, its 2007 federal matching rate).

    [48] See Health Management Associates, Vermont Global Commitment
    Independent Review and Risk Analysis, September 2005.

    [49] For more information on state recycling of federal Medicaid funds,
    see GAO-04-228.

    [50] B-309734, July 24, 2007.

    [51] Budget neutrality is a requirement in place through HHS policy but
    is not a statutory requirement for Medicaid demonstrations.

    [52] GAO-04-480.

    [53] Department of Health and Human Services, Centers for Medicare &
    Medicaid Services, Section 1115 Demonstrations, State Profiles:
    Approvals through February 28, 2006 (Washington, D.C.: 2006).

    [54] We accessed HHS guidance on budget neutrality on March 23, 2007,
    from CMS's Web site: [hyperlink,
    http://www.cms.hhs.gov/HIFA/02_Guidelines.asp].

    [55] B-309734, July 24, 2007.

    [56] The funding specialist profile was established in 2005 and
    designed as an educational tool to assist the newly hired funding
    specialists in understanding the Medicaid State programs to which they
    were assigned. This tool included identification of budget, program,
    and financing. All funding specialists were required to complete these
    profiles, but such profiles were never considered to represent a formal
    Agency position and they were never formally released to States.

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