Medicaid in Schools: Improper Payments Demand Improvements in HCFA
Oversight (Letter Report, 04/05/2000, GAO/HEHS/OSI-00-69).

Pursuant to a congressional request, GAO provided information on states'
practices regarding Medicaid reimbursement of school-based
administrative activities, focusing on: (1) the extent to which school
districts and states claim Medicaid reimbursement for school-based
health services and administrative activities; (2) the appropriateness
of methods states use to establish bundled rates for school-based health
services and assess the costs of administrative activities that their
schools may claim as reimbursable; (3) states' retention of federal
Medicaid reimbursement for services provided by schools and schools'
practice of paying contingency fees to private firms; and (4) the
adequacy of the Health Care Financing Administration's (HCFA) oversight
of state practices regarding school-based claims, including safeguards
employed to ensure appropriate billing for health services and
administrative activities.

GAO noted that: (1) nearly all states reported Medicaid expenditures for
school-based activities, which totalled $2.3 billion for the latest year
of available state data; (2) the majority of payments--about $1.6
billion--were for health services provided by schools in 45 states and
the District of Columbia, and about $712 million was for administrative
activities billed by schools in 17 states; (3) three states--Illinois,
Michigan, and New York--accounted for over 60 percent of total
school-based claims; (4) New York accounted for 44 percent of all health
services payments, while Illinois and Michigan together accounted for 74
percent of all administrative activity payments; (5) Medicaid payments
to schools ranged from a high of nearly $4820 per Medicaid-eligible
child in Maryland to less than 5 cents per child in Mississippi,
reflecting in part variation in the proportion of states' school
districts that submitted claims for Medicaid services and activities;
(6) some of the methods used by school districts and states to claim
reimbursement for school-based services do not ensure that health
services are provided, or that administrative activities are properly
identified and reimbursed; (7) bundled rate methods used by school
districts to claim Medicaid reimbursement for school-based health
services have failed in some cases to take into account variations in
service needs among children and have often lacked assurances that
services paid for were provided; (8) in two states, monthly payments
ranging from $141 to $636 per child were made to schools soley on the
basis of at least 1 day's attendance in school, rather than on
documentation of any actual service delivery; (9) with regard to
administrative activities, poor controls have resulted in improper
payments in at least two states, and there are indications that
improprieties could be occurring in several other states; (10) Medicaid
costs shared by the federal government and the states could fall under
one of the two following categories: (a) medical assistance; and (b)
administrative duties; (11) each state program's federal and state
funding shares of health services payments are determined through a
statutory matching formula; (12) this formula results in federal shares
that range from 50 to 83 percent, depending on a state's per capita
income in relationship to the national average; and (13) over 95 percent
of Medicaid's $177 billion in total expenditures in FY 1998 was spent on
health services.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HEHS/OSI-00-69
     TITLE:  Medicaid in Schools: Improper Payments Demand Improvements
	     in HCFA Oversight
      DATE:  04/05/2000
   SUBJECT:  Children
	     Allowable costs
	     Program abuses
	     Health insurance
	     School health services
	     Administrative costs
	     State-administered programs
	     Cost sharing (finance)
	     School districts
	     Internal controls
IDENTIFIER:  Medicaid Program
	     Illinois
	     Massachusetts
	     Michigan
	     Early and Periodic Screening, Diagnosis, and Treatment
	     Program
	     HHS Individuals With Disabilities Education Act Program
	     New York

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GAO/HEHS/OSI-00-69

Appendix I: Health Care Financing Administration Letter
Dated May 21, 1999

46

Appendix II: Comments From the Health Care Financing
Administration

50

Appendix III: GAO Contacts and Staff Acknowledgments

57

Table 1: States' Annual School-Based Claims, Ranked by Average
Claim per Medicaid-Eligible Child Aged 6 to 20 14

Table 2: Positions on Reimbursement for Medicaid School-Based Administrative
Activities of Those States That Do Not
Currently Pay Claims 19

Table 3: States' Medicaid School-Based Administrative Claims as a Percentage
of Total Medicaid Administrative Expenditures 20

Table 4: Incentives Affecting Volume and Cost of Services, by
Payment Approach 23

Table 5: Approaches to School-Based Payments in Seven States
Using Bundled Rates 24

Table 6: Amount and Percentage of Federal Medicaid
Reimbursement for Health Services and Administrative
Activities Retained by States 32

Table 7: Variations in Schools' Receipt of Medicaid Reimbursement
for Health Services 36

Figure 1: States Reporting Medicaid Claims for School-Based
Services, December 1999 13

Figure 2: Medicaid School-Based Administrative Claims for 10
States, Fiscal Years 1995-98 18

EPSDT Early and Periodic Screening, Diagnostic, and Treatment

HCFA Health Care Financing Administration

IDEA Individuals With Disabilities Education Act

OMB Office of Management and Budget

OSI Office of Special Investigations

SPMP skilled professional medical provider

Health, Education, and
Human Services Division

B-283378

April 5, 2000

The Honorable William V. Roth, Jr.
Chairman
The Honorable Daniel Patrick Moynihan
Ranking Minority Member
Committee on Finance
United States Senate

Schools can be appropriate locations in which to identify low-income
children who are eligible for Medicaid, assist them to enroll, and provide
them Medicaid-covered services. Under Medicaid, a joint federal-state
program that spent about $177 billion in fiscal year 1998, the federal
government pays a share of costs incurred by the states in providing health
care to 41 million low-income beneficiaries, including 13 million
school-aged children. States may use their Medicaid programs to pay for
certain health services provided to eligible children by schools, including
diagnostic screening and ongoing treatment, such as physical therapy. States
may also obtain reimbursement from the federal government for the costs of
administrative activities associated with providing Medicaid services in
schools, such as conducting outreach activities to assist with enrolling
children in Medicaid; providing eligibility determination assistance,
program information, and referrals; and coordinating and monitoring
Medicaid-covered health services.

In June 1999, we testified before your Committee about multimillion-dollar
increases in Medicaid reimbursements for administrative activities in
schools in 10 states and the need for more federal and state oversight of
these growing expenditures.1 In particular, we found that weak and
inconsistent controls over the review and approval of claims for
school-based administrative activities created an environment in which
inappropriate claims could generate excessive Medicaid reimbursements. We
also found that some school districts receive only $4 of every $10 that the
federal government pays to reimburse them for Medicaid-allowable
administrative costs, after the state takes a share of the federal payment
and private firms are paid. Private firms are often engaged by school
districts to design the methods used to claim Medicaid reimbursement, train
school personnel to apply these methods, and submit the claims to state
Medicaid agencies to obtain federal reimbursement.

Since our initial review was limited to administrative cost claims, you
requested that we expand our analysis of state practices regarding Medicaid
reimbursement of school-based administrative activities and address as well
the use of "bundled" rates for school-based services. Bundled rates are
single payments for a package of various services that eligible special
education children may need over a specified period of time; a fixed amount
is paid per child on the basis of the services the child is expected to
require, not on the basis of the services the child actually receives. This
report addresses (1) the extent to which school districts and states claim
Medicaid reimbursement for school-based health services and administrative
activities; (2) the appropriateness of methods states use to establish
bundled rates for school-based health services and to assess the costs of
administrative activities that their schools may claim as reimbursable; (3)
states' retention of federal Medicaid reimbursement for services provided by
schools and schools' practice of paying contingency fees to private firms;
and (4) the adequacy of the Health Care Financing Administration's (HCFA)
oversight of state practices regarding school-based claims, including
safeguards employed to ensure appropriate billing for health services and
administrative activities.

To examine these issues, we surveyed the 50 states and the District of
Columbia, focusing on their Medicaid policies and practices related to
school-based health services and administrative activities. We visited six
states in various regions of the country--Florida, Illinois, Massachusetts,
Michigan, New Jersey, and Vermont--that allow schools to bill Medicaid for
providing health services and carrying out administrative activities and
that represent a mixture of methodologies for submitting claims for
administrative activities, transportation to and from services, and bundled
rate payments.2 We also interviewed officials in 7 of HCFA's 10 regional
offices, the 17 states that allow claims for Medicaid-related administrative
activities, and the 8 states and the District of Columbia that HCFA
identified as using bundled rate payments for health services. In addition,
our Office of Special Investigations (OSI) began ongoing investigative work
in July 1999 to determine whether fraudulent or abusive practices are
occurring. OSI conducts its investigations in accordance with the standards
of the President's Council on Integrity and Efficiency. We performed our
work between July 1999 and March 2000 in accordance with generally accepted
government auditing standards.

Nearly all states reported Medicaid expenditures for school-based
activities, which totaled $2.3 billion for the latest year of available
state data.3 The majority of payments--about $1.6 billion--were for health
services provided by schools in 45 states and the District of Columbia, and
about $712 million was for administrative activities billed by schools in 17
states. Three states--Illinois, Michigan, and New York--accounted for over
60 percent of total school-based claims. New York accounted for 44 percent
of all health services payments, while Illinois and Michigan together
accounted for 74 percent of all administrative activity payments. Medicaid
payments to schools ranged from a high of nearly $820 per Medicaid-eligible
child in Maryland to less than 5 cents per child in Mississippi, reflecting
in part variation in the proportion of states' school districts that
submitted claims for Medicaid services and activities.

Some of the methods used by school districts and states to claim
reimbursement for school-based services do not ensure that health services
are provided, or that administrative activities are properly identified and
reimbursed. Bundled rate methods used by school districts to claim Medicaid
reimbursement for school-based health services have failed in some cases to
take into account variations in service needs among children and have often
lacked assurances that services paid for were provided. In two states,
monthly payments ranging from $141 to $636 per child were made to schools
solely on the basis of at least 1 day's attendance in school, rather than on
documentation of any actual service delivery. With regard to administrative
activities, poor controls have resulted in improper payments in at least two
states, and there are indications that improprieties could be occurring in
several other states. Examples follow.

ï¿½ The HCFA Chicago regional office questioned $30 million in administrative
claims submitted by the state of Michigan for the quarter ending September
1998 for school activities that were not related to Medicaid. Among other
issues, school staff interviewed by HCFA revealed that activities they
performed that were related to general health screenings, family
communications, or staff-related training had no Medicaid component or
benefit, although a portion of their staff time was claimed and reimbursed
as such. The HCFA regional office deferred Michigan's claim for $33 million
in federal payment for the quarter ending September 1999, asking again that
the state better document that school-based claims for administrative
activities were clearly linked to Medicaid.

ï¿½ Our investigation and HCFA scrutiny of claims have also found that
Michigan and Illinois claimed reimbursement for services such as health
evaluations performed for the benefit of non-Medicaid-eligible children. The
resulting improper payments for non-Medicaid-eligible children accounted for
$12.5 million of the $56 million in federal reimbursement that was reviewed
in Michigan for the quarter ending September 1998 and $7.7 million in
Illinois for the quarter ending March 1999. Our investigation in Michigan
identified approximately $28 million in improper federal reimbursement for 2
years.

In some states, funding arrangements among schools, states, and private
firms can create adverse incentives for program oversight and cause schools
to receive a small portion--as little as $7.50 for every $100 in Medicaid
claims--of Medicaid reimbursement for school-based claims. We found that 18
states retained a total of $324 million, or 34 percent, of federal funds
intended to reimburse schools for their Medicaid-related costs; for 7 of
these states, this amounted to 50 to 85 percent of federal Medicaid
reimbursement for school-based claims. In addition, contingency fees, which
some school districts pay to private firms for their assistance in preparing
and submitting Medicaid claims, ranged from 3 to 25 percent of the federal
Medicaid reimbursement, further reducing the net amount that schools
receive. While school districts can--and do--pay private firms for
assistance with Medicaid claims, these fees are not allowable for federal
reimbursement. Yet, our investigation determined that in one state a school
district inappropriately included contingency fees on a Medicaid
administrative cost claim.

Finally, HCFA's overall weak direction and oversight have contributed to the
problems we identified. Although at least one HCFA regional office has
identified cases of improper payments, to date no consistent attempt has
been made to determine how pervasive these practices may be in other regions
and states or to halt them as quickly as possible. Moreover, problems we
identified in last June's testimony--ambiguous policies and inconsistent
oversight--continue and, in fact, have been exacerbated. For example, HCFA's
attempt to clarify transportation policies for school-based services has
been interpreted differently among regional offices, resulting in
inequitable treatment of school district claims for special transportation
needs. Recognizing that schools can be effective sites in which to identify
low-income children eligible for Medicaid, assist them to enroll, and
provide them Medicaid services, we are making recommendations to the
Administrator of HCFA that are aimed at improving the development and
consistent application of clear policies and appropriate oversight for
school-based Medicaid services. Additionally, we are referring evidence of
certain improprieties and other matters to the cognizant U.S. Attorney's
Offices for appropriate action.

Medicaid is a joint federal-state program that in fiscal year 1998 spent
about $177 billion to finance health coverage for 41 million low-income
individuals, 13 million of whom are school-aged children. States operate
their programs within broad federal requirements and can elect to cover a
range of optional populations and benefits. As a result, Medicaid
essentially operates as 56 separate programs: 1 in each of the 50 states,
the District of Columbia, Puerto Rico, and the U.S. territories. Medicaid is
an entitlement program under which the states and the federal government are
obligated to pay for all covered services provided to an eligible
individual.

Medicaid costs shared by the federal government and the states fall under
one of the following two categories: medical assistance (called "health
services" in this report) and administrative activities. Each state
program's federal and state funding shares of health services payments are
determined through a statutory matching formula. This formula results in
federal shares that range from 50 to 83 percent, depending on a state's per
capita income in relationship to the national average. For administrative
activities claims, the federal share varies by the type of costs incurred.
Most administrative expenditures are shared equally between the federal
government and the individual state. However, certain administrative
expenditures are eligible for higher federal matching funds.4 Over 95
percent of Medicaid's $177 billion in total expenditures in fiscal year 1998
was spent on health services.

Schools can help identify eligible low-income children, assist them to
enroll, and provide them Medicaid-covered services, and states are
authorized to use their Medicaid programs to help pay for certain health
care services delivered to these children in schools. In addition, Medicaid
is authorized to cover health services provided to children under the
Individuals With Disabilities Education Act (IDEA).5

Children who qualify for IDEA have access to a wide array of services, and
Medicaid may cover the costs of health-related services provided to eligible
children. In particular, IDEA obligates schools to provide the "related
services" that are required to help a child with a disability benefit from
special education, including transportation, speech-language pathology, and
physical and occupational therapy. Because many services required by the
individualized plan developed to address the specific needs of a child with
a disability are health-related, Medicaid is an attractive option for
funding many IDEA services. Children who qualify for IDEA are frequently
eligible for Medicaid services, and although Medicaid is generally the payer
of last resort for health care services, it is required to pay for
IDEA-related medically necessary services for Medicaid-eligible children
before IDEA funds are used.

IDEA requires that states have in effect policies and procedures to ensure
the identification, location, and evaluation of all children with
disabilities who are in need of special education and related services, a
concept termed "child find." Some activities under Medicaid, such as
outreach in support of Medicaid's Early and Periodic Screening, Diagnostic,
and Treatment (EPSDT) benefit, can be coordinated with IDEA activities.6
While related, these two programs still have distinguishing goals: IDEA's
child-find activities are focused on identifying and meeting the educational
needs of children with disabilities, while EPSDT outreach is directed at
informing children who are potentially eligible for Medicaid about benefits
available under the EPSDT program and facilitating the Medicaid application
process.

School-Based Health Services

Commonly provided school-based health services that qualify for Medicaid
reimbursement include physical, occupational, and speech therapy as well as
diagnostic, preventive, and rehabilitative services. Schools that submit
claims to their state Medicaid agency for reimbursement for health services
must meet Medicaid provider qualifications established by their state and
must have a provider agreement with the state Medicaid agency.7

In addition, states must develop a methodology for determining payment rates
for school-based health services. Payment rates are established by the state
Medicaid agency, described in a state plan, and approved by HCFA. Although
states have broad discretion in establishing payment rates, they must be
reasonable and sufficient to ensure the provision of quality services and
access to care. Within these general payment principles, however,
considerable variation can exist. For example, states may set a payment rate
for each individual service provided or base Medicaid reimbursement on the
actual costs providers incur in supplying services.

Until recently, states have been allowed to develop methods to bundle
payments for a specified group of services. However, in a May 21, 1999,
letter to state Medicaid directors, HCFA prohibited states' use of this
approach because HCFA had concluded that bundled rate methodologies do not
produce sufficient documentation of accurate and reasonable payments. HCFA
informed states that it would not be considering further proposals by states
to use a bundled rate payment system. HCFA directed states with bundled
rates to develop and prospectively implement an alternate reimbursement
methodology. HCFA expected states to come into compliance with its May 21,
1999, letter within a reasonable time frame and stated it would consider
taking action if this did not occur. While HCFA expects to issue further
clarification on bundled rates some time this year, states with previously
approved bundled rates continue to use them.

School-Based Administrative Activities

Schools may also receive reimbursement for the costs of performing
administrative activities related to Medicaid. Administrative activities
performed by school districts and schools may include Medicaid outreach,
application assistance, and coordination and monitoring of health services.
Unlike the requirements for health services claims, a school does not need
to become a qualified Medicaid provider to submit administrative activity
claims. However, there must be (1) either an interagency agreement or a
contract that defines the relationship between the state Medicaid agency and
other parties and (2) an acceptable reimbursement methodology for
calculating payments for administrative activities.

Cost allocation plans are expected to be supported by a system that has the
capability to properly identify and isolate the costs that are directly
related to the support of the Medicaid program. States must also abide by
the cost allocation principles described in Office of Management and Budget
(OMB) Circular A-87, which requires, among other things, that costs be
"necessary and reasonable" and "allocable" to the Medicaid program.8

Services

In August 1997, HCFA issued a technical assistance guide for Medicaid claims
for school-based services.9 This guide provides general information and
guidelines regarding the specific Medicaid requirements associated with
federal reimbursement for the costs of school health services and
administrative activities. HCFA requires states to provide and maintain
appropriate documentation and assurances that claims for administrative
activities do not duplicate other claims or payments.

HCFA's May 21, 1999, letter to state Medicaid directors, in addition to
prohibiting bundling payments, attempted to clarify HCFA's policy on
transportation and stated that HCFA was in the process of updating its
guiding principles related to claims for school-based administrative
activities costs. (See app. I for the full text of the May 21, 1999,
letter.) In February 2000, HCFA released for public comment a draft of its
revised technical assistance guide on submitting school-based administrative
activity claims.10

Practices; Expenditures Continue to Grow

While nearly all the states had Medicaid expenditures for school-based
activities, the extent of participation varied widely, with the volume of
Medicaid administrative expenditures having grown significantly in recent
years. Total Medicaid claims for the most recent year of available state
data range from $8,000 in Mississippi to $682 million in New York; average
claims per Medicaid-eligible child range from less than 5 cents in
Mississippi to nearly $820 in Maryland. This variation can be partially
explained by the proportion of school districts within a state that choose
to file claims. Recent payments for school-based administrative activities
reflect the growing number of school districts making claims for Medicaid
reimbursement for these activities. Moreover, in addition to the 17 states
that currently allow their schools to bill Medicaid for school-based
administrative activities, 12 states have indicated that they may do so in
the future. As a percentage of total Medicaid administrative expenses,
payments for school-based administrative activities range from less than 1
percent in 1 of the 17 states allowing such claims to over 45 percent in
Michigan and Illinois.

While nearly all states allow schools to submit claims to their state
Medicaid agencies for school-based health services, administrative
activities, or both, the extent to which school districts choose to do so
varies. Our survey of the 50 states and the District of Columbia found that
schools in 47 states and the District of Columbia obtain Medicaid payment
for school-based health services, administrative activities, or both. While
15 states allow claims for both health services and administrative
activities, 30 states and the District of Columbia allow Medicaid payment
for health services only. Two states--Alaska and Arizona--limit their
school-based Medicaid payments to administrative activities, and schools in
three states--Hawaii, Tennessee, and Wyoming--do not claim Medicaid
reimbursement for either type of school-based service. (See fig. 1.)

Figure 1: States Reporting Medicaid Claims for School-Based Services,
December 1999

Source: GAO survey of states.

States also vary substantially in the amount of their Medicaid payments for
school-based activities. Medicaid payments to schools ranged from less than
5 cents per Medicaid-eligible child in Mississippi to nearly $820 per child
in Maryland. Three states--Illinois, Michigan, and New York--accounted for
over 60 percent of total school-based claims. New York comprised 44 percent
of all health services payments, while Illinois and Michigan accounted for
74 percent of all administrative activity payments. (See table 1.) Among the
45 states and the District of Columbia that provide Medicaid reimbursement
for school-based health services, such claims have been allowed for periods
ranging from 2 to 28 years. For the 17 states that provide Medicaid
reimbursement for school-based administrative activities, such claims have
been allowed for between 1 and 8 years.

Table 1: States' Annual School-Based Claims, Ranked by Average Claim per
Medicaid-Eligible Child Aged 6 to 20

Continued

                 Average claim per     School-based claims (in thousands)
     State       Medicaid-eligible       Total     Health    Administrative
                       child            claims     claims       claims

 Maryland       $818                  $93,824    $93,824    a
 New York       703                   682,000    682,000    a
 Illinois       674                   385,633    82,946     $302,687
 Michigan       674                   317,701    93,534     224,167
 New Hampshire  658                   24,894     24,894     a
 Rhode Island   600                   27,482     27,482     a
 Delaware       394                   13,900     13,900     a
 Maine          350                   22,000     22,000     a
 Vermont        309                   12,798     11,041     1,757
 Kansas         291                   25,741     25,741     a
 Massachusettsb 284                   65,250     45,750     19,500
 Alaska         265                   7,780      a          7,780
 District of
 Columbia       265                   12,100     12,100     a
 Wisconsinc     249                   45,904     44,312     1,591
 New Jersey     248                   66,328     60,671     5,657
 Connecticut    174                   22,216     22,216     a
 Pennsylvania   121                   68,507     54,555     13,952
 Arizona        115                   25,795     a          25,795
 Utah           114                   7,279      7,279      a
 Minnesota      105                   23,766     271        23,495
 Texas          88                    78,030     66,368     11,662
 Washington     87                    30,367     11,973     18,394
 Oregon         85                    12,441     12,441     a
 South Carolina 79                    14,247     14,247     a
 New Mexico     72                    10,348     5,439      4,909
 Ohio           66                    31,953     31,953     a
 Florida        59                    41,518     3,067      38,451
 Nebraska       58                    3,916      3,916      a
 Missouri       55                    15,381     4,277      11,104
 Iowa           52                    5,255      4,171      1,084
 Nevada         48                    1,900      1,900      a
 Arkansas       45                    5,428      5,428      a
 Coloradod      44                    4,885      4,885      a
 North Dakota   41                    826        826        a
 South Dakota   31                    906        906        a
 Montana        29                    892        892        a
 Louisiana      26                    6,269      6,269      a
 West Virginia  24                    3,044      3,044      a
 Georgia        21                    9,167      9,167      a
 Idahod         20                    781        781        a
 California     19                    42,308     42,020     288
 Oklahoma       10                    1,311      1,311      a
 Kentucky       6                     1,228      1,228      a
 Virginia       5                     1,201      1,201      a
 North Carolina 2                     722        722        a
 Alabama        1                     132        132        a
 Indiana        e                     60         60         a
 Mississippi    e                     8          8          a
 Hawaii         a                     a          a          a
 Tennessee      a                     a          a          a
 Wyoming        a                     a          a          a
 Total                                $2,275,423 $1,563,150 $712,273

Note: States provided school-based claims data for the most recent fiscal
year for which they were available, which for approximately half the states
was state fiscal year 1999. Most of the remaining states provided data for
state fiscal year 1998, federal fiscal year 1998, or calendar year 1998;
three states provided data for periods before July 1997. The average claim
per Medicaid-eligible child was calculated by dividing the total
school-based claims by the number of school-aged Medicaid-eligible children.

aThis state did not report school-based claims in this category.

bMassachusetts provided 6 months of administrative claims data, which we
extrapolated to reflect a full year of claims.

cWisconsin's school-based health claims and administrative claims do not
equal its total school-based claims because of rounding.

dColorado and Idaho provided 11 months of health services claims data, which
we extrapolated to reflect a full year of claims.

eThe average claim per Medicaid-eligible child was less than $1.

Source: GAO analysis of state-reported claims data and HCFA's fiscal year
1997 eligibility data (2082 report).

Some of the variation in Medicaid payments for school-based services and
cost per Medicaid-eligible child is explained by differences in the
proportion of school districts submitting Medicaid claims for school-based
activities. For some states, schools are part of the state Medicaid health
services delivery system, while in other states, schools may not generally
provide direct health services. For example, two states that spent
relatively little per Medicaid-eligible child--Indiana, at less than $1 per
child, and Alabama, at $1 per child--both indicated low percentages of
school district participation, with an Indiana official estimating
approximately 3-percent participation. A state official in California, which
spent less per Medicaid-eligible child than 40 other states, estimated that
in state fiscal year 1998 about 75 percent of the school districts in the
state submitted claims for health services, while only 2 school districts
submitted claims for administrative activities.

States also varied in whether they considered certain activities to be
health services or administrative activities, which could have affected
federal reimbursement because the federal match rate for health services is
higher than the rate for administrative activities in many states. According
to HCFA's technical assistance guide, Medicaid currently allows states to
reimburse transportation and case management as health services,
administrative activities, or both. For example, schools in Maryland and
Nevada claim school-based transportation as a health service, while those in
Massachusetts classify transportation as an administrative activity.
Similarly, Illinois schools claim case management as an administrative
activity, while those in New York claim it as a health service.11 A Michigan
official reported that schools submit claims for case management as a health
service once the individualized plan for a child with a disability has been
developed and written, while case management that takes place before such a
plan is developed is claimed as an administrative activity.

School-Based Administrative Activities

In June 1999, we testified that a growing number of states pay for
reimbursement of school-based administrative activities, and our recent
survey suggests that this growth will continue. From fiscal year 1995
through fiscal year 1998, Medicaid claims for administrative activities
increased fivefold, from $82 million to $469 million (see fig. 2).12 These
increased Medicaid expenditures for school-based administrative activities
reflect growth in the number of states participating, the number of schools
participating, and the size of claims submitted by individual school
districts. For example, from 1996 to 1997, Michigan's Medicaid
administrative claims for schools increased almost threefold, from $79
million to $227 million, which state and school officials indicated was
primarily the result of an increase in the number of school districts
submitting claims.

Figure 2: Medicaid School-Based Administrative Claims for 10 States, Fiscal
Years 1995-98

Note: States that appear in bold lettering began claiming school-based
administrative expenditures in the year listed.

Source: State-reported claims.

Interest in submitting claims to Medicaid for administrative activities
performed in the schools was evident in our recent survey of the 50 states
and the District of Columbia. In addition to the 17 states that currently
allow Medicaid reimbursement for school-based administrative activities,
officials in 12 other states reported that they are considering allowing
school-based claims for these activities in the future. Seven other states
reported that they were "not sure" if they would allow schools to submit
Medicaid claims for administrative activities.13 (See table 2.) Of those
states considering Medicaid reimbursement for school-based administrative
costs, eight identified some possible activities for which they would pay,
including eligibility facilitation, outreach, transportation, program
planning and monitoring, case management, referral, and coordination.

Table 2: Positions on Reimbursement for Medicaid School-Based Administrative
Activities of Those States That Do Not Currently Pay Claims

 Considering reimbursement Uncertain            Not considering
                                                reimbursement
                                                Colorado

                                                Connecticut
 Alabama
                                                Delaware
 Arkansas
                                                Kentucky
 Georgia
                           District of Columbia Louisiana
 Idaho
                           Hawaii               Maine
 Kansas
                           Indiana              New Hampshire
 Nebraska
                           Maryland             New York
 Nevada
                           Mississippi          North Dakota
 North Carolina
                           Montana              Rhode Island
 Ohio
                           Virginia             South Carolina
 Oklahoma
                           (7)                  South Dakota
 Oregon
                                                Tennessee
 Utah
                                                West Virginia
 (12)
                                                Wyoming

                                                (15)

Source: GAO survey of states.

a Few States' Total Medicaid Administrative Costs

The school-based administrative claims of a few states constitute a
significant share of their total Medicaid administrative activity. For
example, these claims represented 47 percent and 46 percent, respectively,
of Michigan's and Illinois' total Medicaid administrative claims. Other
states--Alaska, Arizona, and Washington--had school-based claims as high as
19 to 20 percent of their total Medicaid administrative expenditures. (See
table 3.) A significant portion of the growth in the administrative costs of
four states resulted from reimbursing for school-based activities: Alaska,
Illinois, Michigan, and Minnesota all showed average annual growth rates for
school-based administrative expenditures that were at least twice as high as
the growth rate of all their other Medicaid administrative expenditures
combined.14

Table 3: States' Medicaid School-Based Administrative Claims as a Percentage
of Total Medicaid Administrative Expenditures

Continued

                    School-based       Total Medicaid
                      Medicaid         administrative   Percentage of total
     State         administrative       expenditures       administrative
                     claims (in                            expenditures
                     thousands)       (in thousands)a
 Michigan       $224,167             $477,138           47
 Illinois       302,687              661,188            46
 Arizona        25,795               131,577            20
 Washingtonb    18,394               91,745             20
 Alaska         7,780                40,662             19
 New Mexico     4,909                32,078             15
 Florida        38,451               289,625            13
 Minnesota      23,495               209,412            11
 Massachusettsc 19,500               190,669            10
 Missouri       11,104               131,024            8
 Vermont        1,757                35,659             5
 Pennsylvania   13,952               387,262            4
 New Jersey     5,657                253,991            2
 Texas          11,662               576,952            2
 Iowa           1,084                70,125             2
 Wisconsin      1,591                138,555            1
 California     288                  1,227,657          Less than .02

Note: States were asked to provide administrative claims data for
school-based services from the most recent fiscal year. Although most states
provided data from the year ending June 30, 1999, two states provided data
from calendar year 1998, two states provided federal fiscal year 1998 data,
and three states provided data from state fiscal year 1998 (July 1,
1997−June 30, 1998).

aStates provided total Medicaid administrative expenditures for the same
period as for the school-based administrative claims data.

bAlthough Washington provided school-based administrative claims data for
the year ending August 31, 1999, total Medicaid administrative expenditures
were provided for the closest year of data available, federal fiscal year
1999 (October 1, 1998−September 30, 1999).

cMassachusetts provided 6 months of school-based administrative claims data,
which we extrapolated to reflect a full year of claims.

Source: State-reported claims data.

Provided or Administrative Activities Are Properly Identified and Reimbursed

Some methods used to claim Medicaid reimbursement do not adequately ensure
that health services are provided or that administrative activities are
properly identified and reimbursed. Paying bundled rates for health services
can simplify requirements for schools that participate in the Medicaid
program; however, bundled rates can also create an incentive to stint on
services, or to change what services children receive or where they receive
them to increase payment. To counteract these incentives, bundled rate
methods should differentiate payments among children with varying levels of
need and provide assurances that necessary services are provided. However,
not all states using a bundled payment approach differentiate levels of need
among children or ensure that services paid for are provided. In addition,
poor controls over what constitutes an allowable administrative activity
cost claim have resulted in improper Medicaid reimbursements. In some cases,
Medicaid claims were inappropriately reimbursed because they represented
administrative activities that were not Medicaid-related. In other cases,
claims for administrative activities performed by skilled medical
professionals, which can be eligible for reimbursement at a higher matching
rate of 75 percent, were submitted and paid without adequate documentation
to justify the higher rate.

Incentives

HCFA began to allow states to develop bundled payment approaches in an
attempt to simplify schools' reporting requirements under Medicaid. We
reviewed the payment approaches of seven states that currently use bundled
rates.15 Bundled payments are somewhat comparable to capitation payments
made to managed care organizations. A school district receives a single
payment for all the covered services a child needs during a specified
period, such as a day or month.16 Bundled payments have the advantage of
simplifying schools' submission of claims. One state official told us that
the less complicated paperwork involved with bundled rates has made it
easier for smaller schools to submit claims for Medicaid reimbursement.17

Bundled rates can also reduce the negative incentives that may exist under
other payment approaches. For example, reimbursing schools on the basis of
their actual costs may undermine interest in delivering services
efficiently. In addition, a fee-for-service approach, which is used by the
majority of states, does not provide schools with an incentive to control
the volume of services provided because schools in these states receive more
revenue for providing more services. (See table 4.) Counteracting the
adverse incentives that may exist under these other payment approaches is
challenging. Reviewing utilization or cost reports to establish that costs
are allowable or services are necessary is expensive. In contrast, bundled
rates can help limit the costs of delivering services by creating the
incentive to provide needed services more efficiently. Under a bundled
approach,

however, costs can also be limited by neglecting to provide all needed
services or by compromising the quality of individual services provided.
These undesirable effects can be reduced by modifying how bundled rates are
paid and exercising additional oversight of the services delivered.

Table 4: Incentives Affecting Volume and Cost of Services, by Payment
Approach

                          Do incentives exist for providers to increase
 Payment approach
                          Volume of services to an individual?  Unit cost?
 Cost-based reimbursement Yes                                   Yes
 Fee-for-service rates    Yes                                   Noa
 Bundling rates           Nob                                   Noa

aUnder this payment approach, incentives to increase the unit cost do not
exist, provided the unit costs are based on reasonable and appropriate
costs.

bBundled rate payments can, however, provide an incentive to inappropriately
decrease the volume of services provided.

Source: GAO analysis of payment incentives.

In order for bundled rate methods to result in appropriate payments, the
amount paid should be appropriately aligned with the expected cost of
services. For schools, bundled payments that take into account the variation
in service needs among children and ensure that services are provided help
ensure that Medicaid funds are appropriately spent and children's needs met.
However, the methods currently employed by some of the seven states using
bundled rates do not satisfy these criteria (see table 5).

Table 5: Approaches to School-Based Payments in Seven States Using Bundled
Rates

                                                              What event
              Does the bundled                                triggers
 State        rate vary depending   What is the unit of       submitting a
              on the needs of the   payment for services?b    claim to
              child?a                                         Medicaid for
                                                              reimbursement?

 Connecticut  No--one statewide     Monthly rate--$336 per    Receipt of one
              rate                  child                     service
              Yes--14 statewide     Monthly                   School
 Kansas       rates; vary by        rate--$151−$636     attendance 1
              primary disability    per child                 day a month
              Yes--13 statewide     Monthly                   School
 Maine        rates; vary by        rate--$141−$442     attendance 1
              primary disability    per child                 day a month

              Yes--seven            Six daily
              statewide rates;      rates--$11−$48 per
 Massachusettsvary by time spent    child;                    School
              in a regular                                    attendance
              classroom             one weekly rate--$106
                                    per child
              Yes--four statewide   Daily
 New Jersey   rates; vary by type   rate--$33−$172 per  Receipt of one
              of school             child                     service
                                    Daily
 Utah         No--school-specific   rate--$21−$60 per   School
              rates                                           attendance
                                    child
              Yes--four statewide                             Receipt of a
                                    Monthly
 Vermont      rates; vary by        rate--$162−$1,598   specified
              number of services                              number of
              actually provided     per child                 services

aStates may exclude certain services, such as development and evaluation of
the individualized plan of a child with a disability, EPSDT diagnosis and
treatment, and provision of medical equipment, from their bundled rates and
separately claim Medicaid reimbursement for these services.

bFor all but one state, the rates are current and are rounded to the nearest
dollar. The rates listed for Vermont are from the 1998-99 school year.
Vermont's rates have historically been adjusted annually for salary
increases.

Source: State Medicaid agencies.

As table 5 indicates, states' bundled rates vary in the extent to which they
adjust payments among children with different medical needs. For example,
the bundled rates of two states--Connecticut and Utah--do not recognize that
the costs for providing services to children with different medical needs
may vary considerably. Participating schools in Connecticut receive a
monthly payment of about $336 for each eligible child, regardless of whether
that child has a mild learning disability or has multiple physical and
cognitive disabilities. This statewide rate may not cover the full costs
incurred by schools that have a disproportionate number of children whose
services cost more, which may affect schools' ability to provide necessary
services. Conversely, other schools may be paid an amount higher than their
actual costs. In two other states, Massachusetts and New Jersey, the payment
level is based on the location of the child, and not necessarily on the
number or scope of services that he or she receives. Specifically,
Massachusetts' schools are paid on the basis of the percentage of time an
eligible child spends in a regular classroom, whereas New Jersey has four
statewide rates that vary depending on where the child attends school.18

Bundled payment rates in other states, such as Kansas, Maine, and Vermont,
are more aligned with the expected cost of services for specified groups of
children. For example, schools in Kansas and Maine receive the same payment
amount for all children with specified disabilities, such as autism or
mental retardation. While these rates do not recognize differences in the
number and intensity of services provided to children within each disability
category, they do recognize that schools can incur significantly higher
costs for children with certain disabilities. Vermont does not distinguish
among types of disabilities but does have four different levels of
reimbursement, which vary depending on the number of services a child
actually receives in a given week, as well as on who provides those
services.19

In addition, states' bundled approaches should ensure that services paid for
are actually provided. However, payments currently made in four of the seven
states--Kansas, Massachusetts, Maine, and Utah--are not specifically linked
to the receipt of services because reimbursement is triggered simply by
school attendance. Participating schools in these states are reimbursed the
bundled rate for each eligible child, irrespective of whether the child has
received any services. For example, schools in Kansas are reimbursed about
$476 a month for each child whose primary disability listed on the
individualized plan is autism, as long as the child attended school at least
1 day in a given month. In such an arrangement, there is little
accountability for providing needed services because attendance--not the
receipt of services--triggers reimbursement.

Varying levels of assurances exist in Connecticut, New Jersey, and Vermont
that services are actually provided to eligible children. For example,
schools in Connecticut must document on a monthly service information form
the number and type of services provided to each child. However, schools
have to provide a child with only one service during the month to be
eligible for the full payment. Similarly, New Jersey schools can claim the
per diem reimbursement for each day an eligible child receives at least one
service that is documented by the school. In Vermont, case managers complete
for each child a level-of-care form that categorizes the hours of service,
type of provider, and setting (one-on-one or group). Using these data, a
clerk computes the total units of service each child receives to justify the
payment for one of four levels of care.

Administrative Claims

Poor controls on the part of states and school districts have resulted in
improper reimbursements for Medicaid administrative claims. The methods
states allow school districts to use to determine administrative costs
strongly influence the amount of Medicaid reimbursement school districts
receive. Determining allowable Medicaid-related administrative costs
involves identifying direct costs, such as for personnel and supplies, and
allocating them between Medicaid and non-Medicaid activities, as well as
allocating an appropriate share of indirect (overhead) costs to Medicaid.20
In most cases, school personnel involved in special education can serve both
Medicaid and educational functions; thus, the costs of administrative
activities must be allocated to each function.21 Two aspects of the methods
for determining administrative cost allocations are vulnerable to
contributing to overstated Medicaid costs: (1) time study methodologies,
which are used to identify the portion of staff time spent on
Medicaid-related activities, and (2) activity codes, which are used to
identify functions performed by school staff in these time studies. In
addition, some school districts have received reimbursement for
administrative activities at the enhanced 75-percent federal matching rate
for skilled professional medical providers, such as physical therapists,
without providing adequate documentation that their professional
capabilities were needed for such activities, as required by Medicaid
regulations.

Different Time Study Methods Have Led to Considerable Variation in
Reimbursement

Some time study methods that states allow schools and school districts to
use in determining Medicaid-related school-based administrative costs are
questionable and could be used to inappropriately increase Medicaid
payments. Differences in time study methodologies can--and do--affect the
level of states' reimbursements. States vary in the extent to which they
instruct school districts on the type of time study methodology permitted.

We identified three basic methods used to allocate the time of school
personnel to Medicaid-related administrative activities: the representative
period, random moment, and continuous log methods.22 The representative
period method is the one most vulnerable to manipulation. In contrast to the
random moment time study, for example, which always randomly selects a
period of time to be studied, representative periods may not always be
randomly selected. This method is also the one most frequently used. Of the
17 states with schools that file administrative cost claims, 15 allow the
use of representative period time studies for determining cost
allocations.23 Moreover, 9 of the 15 states that specify the use of a
representative period study either specify the use of a nonrandom
representative period or allow the school districts or private firms
involved in the time studies to make this decision.24

How the selection of the sample period can affect study results is
illustrated by an example from Florida. When a private firm representing
nine Florida school districts changed the time study method they used from a
sampling period of 1 week per quarter to a random sample of moments
throughout the quarter, the amount of federal reimbursement claimed
decreased by 50 percent.

Loosely Defined Activity Code Categories Have Overstated Costs Related to
Medicaid

Loosely defined activity code categories used by time study participants to
record time spent on administrative activities have resulted in overstated
Medicaid costs.25 While typical activity code categories may include
outreach related to the Medicaid program, coordinating and monitoring of
health services, and facilitating Medicaid eligibility determinations, these
categories and their codes vary among and within states, particularly when
multiple private firms contract with school districts within a state to
submit administrative cost claims.

While staff from HCFA's central office and several regional offices
emphasized the importance of developing clearly defined activity codes, some
states' methods allow certain activities to be inappropriately claimed as
Medicaid administrative costs. For example, HCFA's Chicago regional office
questioned activities for which $30 million in federal reimbursement had
been claimed and paid for one quarter for participating schools in Michigan.
The activity codes in question included general health screenings,
communication with families, and staff training as Medicaid administrative
activities. However, HCFA regional office interviews with a sample of staff
who allocated their time to these activity codes revealed no direct
connection between staff activities and Medicaid; these staff did not know
what Medicaid covers, where or how to apply for Medicaid, or who might
qualify for coverage. Moreover, the only Medicaid-related training activity
identified in HCFA's review was for purposes of completing the time study;
interviewed school staff indicated that Medicaid was not mentioned during
other identified training sessions. The activity codes in question
constituted 53 percent of the $56 million in federal reimbursement claimed
for administrative activities by Michigan's school districts for the quarter
ending September 1998. HCFA recommended that Michigan revise its time
study's activity code definitions to more accurately identify activities
related to the Medicaid program or recipients. The HCFA regional office
deferred Michigan's claim for $33 million in federal reimbursements for the
quarter ending September 1999, asking again that the state better document
that school-based claims for administrative activities were clearly linked
to Medicaid.

Our investigation and HCFA scrutiny of claims in Michigan and Illinois also
disclosed federal reimbursements for health reviews and evaluations
performed for the benefit of non-Medicaid-eligible children. These improper
claims for non-Medicaid-eligible children in schools accounted for $12.5
million of the $56 million in federal reimbursement that was reviewed in
Michigan for the quarter ending September 1998 and a $7.7 million
reimbursement to Illinois--$2.4 million for one school district consortium
for the quarter ending December 1998 and $5.3 million for the quarter ending
March 1999 for the remaining school districts that claim reimbursement. Our
investigation in Michigan identified approximately $28 million in improper
federal reimbursement for 2 years.

Our review of the 17 states that allow schools to file administrative claims
showed that some of the questionable activity code definitions used in
Illinois and Michigan are also being used for activity codes in 9 other
states. Of these nine states, four do not specifically mention Medicaid in
descriptions of relevant activities.26 In contrast, at least one state
preferred to develop its own activity codes, rather than adopt those already
in use in other states, because the other state codes were "too loose to be
appropriate" and did not differentiate Medicaid-related activities from
those relating to non-Medicaid-eligible children.

Claims Based on Professional Credentials Have Resulted in Questionable
Payments

Claims for administrative activities performed by skilled professional
medical providers (SPMP) at the 75-percent enhanced matching rate have also
resulted in questionable payments. Of the 17 states submitting claims for
administrative costs, 11 states allow the use of the SPMP enhanced rate for
school-based administrative claims. In general, the SPMP rate can be
legitimately used only when the person (1) has the appropriate credential,
such as a nurse, occupational therapist, or physical therapist, and (2)
performs an administrative activity that requires professional medical
knowledge and skills. For example, a nurse who meets with a child and
notices a condition that needs medical attention could submit a claim for
this activity at the SPMP enhanced matching rate of 75 percent. However, a
nurse who only arranges a medical appointment for a child would not need his
or her credentials to make an appointment and thus would not be eligible for
the 75-percent enhanced matching rate. The enhanced matching rate of 75
percent for SPMP administrative activities can be a strong incentive for
those preparing and submitting claims, as it increases by 50 percent the
amount of federal reimbursement that can be received.

In two states--Illinois and Michigan--we found that, on the advice of
private firms, school districts have submitted claims that inadequately
document the need for professional credentials for purposes of submitting an
SPMP claim. For example, we found that one private firm told the SPMPs in
its client school districts to claim the enhanced rate for every
administrative activity they perform, rather than document in each case
whether their skill was required. Another private firm told SPMPs that, when
tracking their time, they had only to check a box to indicate that their
medical credential was necessary for a particular activity, and that no
further documentation or proof was needed for the enhanced Medicaid
reimbursement.27 Recent SPMP claims in Illinois totaled $16.6 million, or 37
percent of its total claims, for one quarter for participating school
districts.28 In Michigan, SPMP claims totaled $14 million, or 25 percent of
the state's total administrative activity for all participating school
districts for the quarter ending September 1998.29

Paid to Private Firms--Reduce the Federal Dollars Schools Receive

Funding arrangements among states, schools, and private firms create adverse
incentives for program oversight and significantly reduce the amount of
federal dollars that schools receive for Medicaid-related services and
activities. Of the 47 states and the District of Columbia that submit claims
on behalf of schools for health services, administrative activities, or
both, 18 retain some portion of federal Medicaid reimbursements rather than
fully reimbursing schools for their Medicaid-related costs. Because states
can benefit directly in this way from higher federal payments, states'
incentives to exercise strong oversight over the propriety of school-based
claims can be diminished. In addition, many school districts have
contingency arrangements with private firms that pay them a share of
Medicaid reimbursement, in some cases, a percentage of the federal share of
reimbursement received from a claim. Embedded in both of these practices are
incentives for states and private firms to experiment with "creative"
billing practices, some of which we have found to be improper. Moreover, the
result of these actions is that, in some states, schools could receive as
little as $7.50 in federal Medicaid reimbursements for every $100 spent to
pay for services and activities performed in support of Medicaid-eligible
children.

Oversight

Eighteen states retain a portion of the federal Medicaid reimbursement
resulting from school districts' claims. According to several state
officials, because state budgets fund a portion of school activities,
Medicaid services provided by schools are partially funded by the state.
According to this reasoning, some states believe they should receive a share
of the federal reimbursements claimed by school districts. However, it is
not clear that state, rather than local, funds support the
Medicaid-reimbursable services, as opposed to other educational activities
for which states provide funds. Moreover, we believe that such a practice
severs the direct link between Medicaid payment and the services delivered
and increases the potential for the diversion of Medicaid funds to purposes
other than those intended.

We found that seven states retain from 50 percent to 85 percent of the
federal Medicaid reimbursement for health services, while another nine
states retain between 1 and 40 percent of federal payments. Among the states
that claim Medicaid reimbursement for administrative activities, three
retain 50 percent or more of the federal reimbursement, while another seven
keep between 1 and 40 percent. (See table 6.)

Table 6: Amount and Percentage of Federal Medicaid Reimbursement for Health
Services and Administrative Activities Retained by States

               Percentage of
               federal              Percentage of federal  Amount retained
 State         reimbursement for    reimbursement for      by state (in
               health services      administrative         thousands)a
               retained             activities retained
 New Jersey    85                   85                     $25,815
 Iowa          75                   0                      1,984
 Delaware      70                   b                      4,865
 Vermont       60                   15                     4,266
 Alaska        b                    52                     2,023
 New York      50                   b                      170,500
 Pennsylvania  50                   50                     18,079
 Washingtonc   50                   0                      3,122
 Connecticut   40                   b                      4,443
 Michigan      40                   40                     69,156
 Wisconsin     40                   40                     10,749
 Illinoisd     10                   10                     6,391
 New Mexico    5                    5                      314
 Ohio          4                    b                      741
 Utah          2                    b                      105
 Colorado      2                    b                      50
 Massachusetts 1                    1                      326
 Minnesota     0                    5                      587
 Total                                                     $323,516

aStates provided school-based claims data for the most recent fiscal year
for which they were available, which for approximately half the states was
state fiscal year 1999. Most of the remaining states provided data for state
fiscal year 1998, federal fiscal year 1998, or calendar year 1998; three
states provided data from before July 1, 1997.

bThis state does not claim reimbursement for this type of school-based
activity.

cWashington retains at least 50 percent of federally reimbursed funds but
can retain a higher percentage depending on whether the school district is
"fully participating" in billing Medicaid for school-based services.

dWhen total Medicaid payments to an Illinois school district exceed $1
million in a year, 10 percent of the portion exceeding $1 million is
retained for the state's general revenue fund. According to the state, 22 of
its 900 school districts received more than $1 million.

Source: State-reported data.

When a state benefits directly from federal reimbursements for schools,
questions arise concerning its incentives to exercise appropriate oversight
of Medicaid program operations for school-based claims. The improper
activities cited in this report--particularly those for administrative cost
claims--are symptomatic of the lack of sufficient oversight, such as
state-level reviews of school-based claims for their appropriateness. For
example, one auditor from the Department of Health and Human Services'
Office of Inspector General told us that Medicaid program oversight in one
state is geared toward ensuring adequate documentation of claims and not
toward examining claims for appropriateness. Our contacts with the auditors'
offices of six states revealed that these states conducted no state-level
reviews of Medicaid school-based claims.

Moreover, we identified similar concerns about states' oversight in our
investigation of improper practices in making school-based fee-for-service
claims for health services. For example, our investigation of
fee-for-service payments for health services in one state revealed that
schools were submitting, and the state was paying, transportation claims for
all Medicaid children who had received a Medicaid health service at school
without verifying that the child had used school bus transportation. Our
investigation further identified instances in which the transportation
services for which the state submitted claims were not provided, resulting
in improper Medicaid reimbursements. In another investigation, we uncovered
practices under which Medicaid was inappropriately billed for health
services in one state, and other investigators identified similar practices
in another state. Specifically, in both states, some group therapy sessions
were billed as individual therapy sessions, which resulted in a higher
payment for the school.

Claims

Some school districts paid private firms fees ranging from 3 percent to 25
percent of the federal reimbursement amount claimed; fees most commonly
ranged from 9 to 12 percent. These firms are usually hired to assist with
administrative cost claims, generally designing the methods used to make
these claims, training school personnel to apply these methods, and
submitting administrative claims to state Medicaid agencies to obtain the
federal reimbursement that provides the basis for their fees.30 By receiving
a percentage of reimbursement rather than a fixed fee, these firms have an
incentive to maximize the amount of reimbursements claimed.

Private sector interest in working with states and school districts to seek
Medicaid reimbursement for administrative activities is high. In addition to
the 17 states that currently submit administrative claims, officials from at
least 7 other states told us that private firms interested in developing
administrative claims methodologies had recently contacted them or schools
in their state.

Marketing materials from two private firms explain one of the reasons
concerns have been expressed that school districts' administrative claims
may exceed reasonable or allowable costs. In these materials, the firms
assert that their objectives are to maximize Medicaid revenues for schools
and that they can maximize a school's claim potential by training school
personnel to follow their methods for claiming costs. One firm emphasized
that, on average, its clients annually receive over 30 percent more per
student than schools contracting with a competitor.

While schools can--and do--pay private firms on a contingency basis for
Medicaid-related services, these contingency fees do not qualify for federal
Medicaid reimbursement.31 OMB Circular A-87, which establishes the
principles and standards for determining "reasonable" and "allocable" costs
for federal programs such as Medicaid, states that the costs of professional
and consultant services rendered are allowable when reasonable and when not
contingent upon the recovery of costs from the federal government.32 In one
state, our investigation determined that contingency fees were improperly
included in one school district's Medicaid administrative cost claim. We
estimate that the resulting unallowable costs claimed for reimbursement may
approximate $1 million for a 5-year period.

Reimbursement

In some states, schools can receive a small portion of Medicaid
reimbursement for performing covered health services and administrative
activities on behalf of eligible children. In addition to states' policies
to retain a portion of federal Medicaid reimbursement and school districts'
contractual arrangements to pay private firms a share of their federal
reimbursements, the school districts' budgets often serve as the local funds
that are used to supply the state's share of Medicaid funding for
school-based claims. When school funds provide the state share of Medicaid
reimbursement, the maximum additional funding that a school district can
receive for delivering services or performing administrative activities is
what the federal government contributes. This is substantially less than
what a private sector Medicaid provider would receive for delivering and
submitting a claim for similar services.33 For example, a physician who
submits a claim with an allowable amount of $100 will receive $100: $50 in
state funds and $50 in federal funds.34 In contrast, when a school district
submits a claim for $100, and the school district pays the state's share of
this claim, the maximum the school district can receive is the $50 federal
share. Of the 47 states that allow Medicaid claims for school-based
activities, 38 use local funds for the state match to federal dollars.35
Table 7 shows the variation in the amounts different schools might receive
in Medicaid reimbursement for the claims they submit, given the source of
the states' share of funding, states' policies to retain portions of the
federal reimbursement, and contingency fee arrangements with private firms.

Table 7: Variations in Schools' Receipt of Medicaid Reimbursement for Health
Services

                 State
                                                        New
                 Florida   Illinois  Vermont   Michigan          Minnesota
                                                        Jersey
 Amount claimed  $100.00   $100.00   $100.00   $100.00  $100.00  $100.00
 Local funds
 useda           (44.18)   (50.00)   (38.03)   (47.28)  (50.00)  0
 Amount retained
 by stateb       0         (5.00)c   (37.18)d  (21.09)  (42.50)  0
 Total Medicaid
 funds received
 by school       55.82     45.00     24.79     31.63    7.50     100.00
 district
 Amount paid to
 private firm by (10.05)f  (8.25)    0         (10.54)  g        h
 school districte
 Net amount to
 school district $45.77    $36.75    $24.79    $21.09   $7.50    $100.00

aThis amount reflects the state's share of Medicaid funding for health
services for fiscal year 1999. For administrative activities, states' shares
would generally be 50 percent.

bThe amount retained by the state is deducted from the federal
reimbursement.

cWhen total Medicaid payments to an Illinois school district exceed $1
million in a year, 10 percent of the portion exceeding $1 million is
retained for the state's general revenue fund. According to the state, 22 of
its 900 school districts received more than $1 million.

dThe percentage retained by Vermont varies from year to year. The amount
noted reflects the percentage retained for Vermont's 1999 school year.

ePrivate firms' contingency fees vary across school districts and states;
thus, the dollars reported in this table are estimates of typical
contingency fees paid by school districts.

fEffective February 14, 2000, contingency fee reimbursement contracts are
prohibited for school districts in Florida.

gThe state of New Jersey pays the firm $2.55 from the $42.50 it retains.

hMinnesota state officials were not aware of any contingency fee
arrangements being used by school districts; thus, we did not report dollars
in this example.

Source: GAO analysis of state data.

Claims

HCFA oversight practices--past and present--have not ensured the
appropriateness of school-based practices for claiming Medicaid
reimbursement. As we testified in June 1999, HCFA's guidance in the past has
generally left much to regional office discretion, resulting in
inconsistencies in the oversight and review of claims. Written guidance has
consisted primarily of a technical assistance guide and a direction for
states to follow the federal requirements for administrative cost
allocations found in OMB Circular A-87. Despite HCFA's May 21, 1999, letter,
which was partially intended to provide clarification in areas concerning
bundling and submitting claims for administrative activities and special
transportation services, HCFA regional offices continue to interpret
policies inconsistently.36 This lack of adequate direction and oversight has
permitted the development of an environment of opportunism and has led to
improper Medicaid claims for administrative activities and limited
assurances that children are receiving appropriate services.

Methods Have Not Been Developed

In its May 21, 1999, letter, HCFA instructed states with bundled rates to
develop and implement an alternative reimbursement methodology but did not
provide a time frame in which to do so.37 To assist states in this effort,
the agency also announced that it would create a work group of officials
from states using bundled approaches, the Department of Education, and other
federal agencies to discuss alternative arrangements.

However, since HCFA issued this letter, the seven states that were using a
bundled approach continue to do so. In fact, officials in some of these
states told us that they intend to continue to use their bundled approaches

until HCFA clarifies its position or issues additional guidance.
Furthermore, the work group that was established as a result of the HCFA
letter is currently inactive. While the group initially met weekly via
telephone, its members neither made any formal decisions about the future of
bundling nor developed alternative payment approaches. In October 1999, HCFA
officials announced that the group would not reconvene until sometime in
2000, because it needed time to discuss issues concerning bundling. As of
March 1, 2000, the work group had not yet reconvened.

HCFA has made some efforts to improve oversight of school-based
administrative claims. It has conducted individual reviews of practices
identified in this report in a few states and is working with a few states
to revise their activity codes to more accurately capture the costs
associated with Medicaid-related activities in schools. Finally, the
additional guidance that HCFA testified in June 1999 would be forthcoming
was released for public comment in February 2000.

Despite these efforts, the lack of clear guidance on how to develop methods
for submitting administrative claims continues to result in significant
inconsistencies among regions. For example, while some HCFA regional offices
have scrutinized the details of states' methodologies for developing
administrative claims, other regional offices have had little or no
involvement in the development of their states' methodologies. The area of
enhanced rates for skilled providers is a specific example of the
contradictory policies of regional offices. The Chicago regional office
allows Illinois and Michigan school districts to claim administrative
activities provided by SPMPs at a 75-percent match rate as opposed to the
general administrative match rate of 50 percent. In contrast, the school
districts in Massachusetts are not allowed to claim this enhanced rate
because HCFA's Boston regional office does not allow the higher rate.
According to officials in the Boston office, "there was no way in the world"
to document that certain activities required a skilled level of performance.
Still other HCFA regional offices, such as San Francisco, have adopted a
different approach, allowing the use of the enhanced rate under certain
circumstances.

More Questions Than It Answers

HCFA's attempt to clarify its policy on school districts' practices in
claiming Medicaid reimbursement for special transportation related to
school-based services has added to the uncertainty surrounding this issue
rather than clarifying the matter. The HCFA letter indicated that school
districts should not bill to Medicaid the transportation costs of a child
who qualifies for special education under IDEA and who rides the regular
school bus with children without disabilities. According to HCFA central
office officials, the general intention was to discontinue the practice of
allowing Medicaid reimbursement for children who needed no additional
assistance and could ride the regular school bus by themselves without any
special equipment or the assistance of an aide.

However, regional offices and states have conflicting interpretations of
what an appropriate special transportation claim is, with the likely result
that Medicaid reimbursement will continue to be inconsistent across states.

ï¿½ Officials in one of the seven regional offices that we spoke with
correctly believed that Medicaid would cover transportation costs if a child
was able to ride on a regular school bus but required the assistance of an
aide; two other regional offices incorrectly asserted that transportation
costs could not be reimbursed because the child would not be riding a
specially adapted vehicle; and officials in the remaining four regional
offices did not know whether reimbursement would be allowed.

ï¿½ Officials in two of the states we visited told us they will now allow
school districts to claim Medicaid reimbursement only for the use of
vehicles that have a wheelchair lift or some adaptation that would meet the
needs of children with physical disabilities--a policy that is inconsistent
with the intent that HCFA officials described to us.

ï¿½ At least two states are awaiting further clarification from HCFA and
continue to have school districts that claim transportation costs for
children with special education needs who receive a Medicaid service at
school--including costs for those riding regular school buses with an aide.

The inconsistent interpretations cited above raise concerns of unequal
consideration of children with different types of disabilities. In
particular, state and school districts are unclear regarding HCFA's policy
for submitting claims for children who have behavioral needs or
developmental disabilities, but no physical disability. In many cases, these
children have the physical capability to ride the regular school bus but may
need the assistance of an aide to ride the bus because of cognitive
impairments or behavioral concerns. Further, some contend that requiring a
physically adapted bus in order to receive reimbursement--as is currently
interpreted by some states and HCFA regional offices--may conflict with the
concept of "least restrictive environment"; thus, children may be
unnecessarily segregated into specialized transportation.38

Almost one-third of Medicaid-eligible individuals are school-aged children,
which makes schools an important service delivery and outreach point for
Medicaid. Even when schools do not directly provide Medicaid-covered health
services, schools can undertake administrative activities that help
identify, refer, screen, and assist in the enrollment of Medicaid-eligible
children. Outreach and identification activities help ensure that the most
vulnerable children receive routine preventive health care and ongoing
primary care and treatment. Most states are seeking Medicaid funds to assist
them in providing medically related services to children with disabilities
and to link children to appropriate health services.

Given the broad range of school and state practices, to date there have been
poor controls on the varied approaches to submitting claims for Medicaid
reimbursement for school-based health services and administrative
activities. Such controls must achieve an appropriate balance between the
states' needs for flexible, administratively simple systems and the
assurance that federal funds are being used for their intended purposes.
HCFA's current oversight practices have failed to provide that assurance,
resulting in confusing and inconsistent guidance across the regions and
failure to prevent improper practices and claims in some states. Without
adequate controls and consistent oversight, Medicaid is vulnerable to paying
for unneeded activities and services or for activities and services that
have not been provided. Examples of such concerns follow.

ï¿½ Bundled payment systems have the potential to reduce adverse incentives
that are created by other payment systems, such as fee-for-service and
cost-based reimbursement. Although additional safeguards can strengthen the
benefits associated with bundled rates, we believe that prohibiting the use
of bundled rates altogether, as HCFA recently did, is not warranted.
Bundling rates can be an acceptable payment mechanism, provided that (1)
rates account for children's different levels of need and (2) rates are
developed in such a way as to provide assurances that they are not
vulnerable to manipulation or resulting in inadequate services.

ï¿½ With regard to administrative cost claims, poor controls have resulted in
improper payments for Medicaid reimbursement in several states. As a result,
Medicaid has reimbursed either for activities that were not covered or for
children who were not eligible for Medicaid. Furthermore, claims submitted
for administrative activities performed by skilled professionals have been
reimbursed at a higher matching rate than available documentation could
support.

ï¿½ Specialized transportation, for which HCFA provided policy clarification
in May 1999, continues to be overseen and approved haphazardly, resulting in
potentially inequitable practices for children with different types of
disabilities across different regions.

Finally, inadequate HCFA oversight has created an environment ripe for
opportunism and vulnerable to fraud.

ï¿½ Contingency fees paid to private firms by school districts have created
the incentive to inappropriately maximize claims for Medicaid reimbursement.
Improprieties in claims identified by our investigations and those of HCFA
demonstrate how weaknesses in federal and state efforts to curtail this
incentive can result in improper costs.

ï¿½ When states stand to benefit financially by retaining a substantial share
of schools' federal Medicaid reimbursements, the potential exists for a
conflict of interest in ensuring that adequate oversight and controls are in
place to ensure the appropriate use of Medicaid funds.

In order to improve the development and application of policies for Medicaid
reimbursement of claims for allowable school-based health services and
administrative activities, we recommend that the Administrator of HCFA

ï¿½ allow the use of bundled rates as one of several alternative payment
approaches, provided that HCFA establishes consistent principles for
bundling that effectively address (1) provisions for rates that reflect or
recognize varying levels of services to accommodate children and (2)
assurances that children receive appropriate and needed services;

ï¿½ develop a methodology to approve and monitor state practices regarding
allowable costs for administrative activities in schools that establishes
consistent federal requirements for methods of allocating costs to Medicaid
and accounting for professionals' time; and

ï¿½ clarify the agency's policy on specialized transportation, with the goal
of establishing policies that offer equitable treatment for children with
different types of disabilities.

We provided HCFA and the state Medicaid agencies we visited an opportunity
to comment on a draft of this report. With respect to bundled rates for
health services, HCFA commented that its May 1999 position emanated from its
concern that the existing methodologies did not meet statutory requirements
for payments consistent with efficiency, economy, and quality care. In
considering future requests for bundled rate payments, HCFA indicated it
would address such issues as reasonable payment levels, adequate
documentation that covered services are provided only to Medicaid-eligible
children, and sampling methodologies to verify the accuracy of
documentation. This approach should provide better assurances that payment
rates reflect children's varying needs and that services paid for were
provided, but we would caution that new requirements not create a de facto
fee-for-service environment and thus undermine the intended benefits
associated with a bundled payment approach.

HCFA concurred with our recommendations on administrative cost claims and
specialized transportation. With respect to administrative claiming, HCFA
listed a number of steps it said it would take to address our
recommendations. Among other things, this list included revising and
finalizing a Medicaid school-based administrative claiming guide that it
released for public comment in February 2000, providing training and
technical assistance to states and school districts to facilitate their
efforts, and developing processes for monitoring existing school-based
claiming activities and approving states' changes in this activity. HCFA
expressed its commitment to working with its various partners--including the
Department of Education, states, and schools--to better ensure the proper
and efficient operation of Medicaid school-based programs. (See app. II for
HCFA's comments.)

Most of the states that responded commented that our analysis of Medicaid
reimbursement received by schools, as shown in table 7, did not reflect the
portion of local school funding provided by the states. In addition, some
states continue to assert that their retention of a share of federal
Medicaid reimbursement is justified as reimbursement for their own level of
funding support to schools. We continue to believe that it is not clear that
state, rather than local, funds support the Medicaid-reimbursable services
as opposed to other educational activities for which states provide funds.
Moreover, we believe that such practices sever the direct link between
Medicaid payment and services delivered, increase the potential for federal
funds to be diverted to purposes other than those intended, and are
inconsistent with the program's fundamental tenet that federal dollars are
provided to match state or local dollars for Medicaid services delivered to
eligible individuals. Finally, a few of the states said that additional
guidance is needed for how states should claim federal reimbursement for
administrative costs and specialized transportation.

HCFA and the state Medicaid agencies also provided technical comments, which
we incorporated as appropriate.

We are providing copies of this report to the Honorable Donna E. Shalala,
Secretary of Health and Human Services; the Honorable Nancy-Ann Min DeParle,
Administrator of HCFA; appropriate congressional committees; and other
interested parties.

If you or your staff have any questions about this report, please call
Kathryn G. Allen at (202) 512-7118. For questions regarding our
investigation, contact Robert H. Hast at (202) 512-7455. Other staff who
made major contributions to this report are listed in appendix III.

Kathryn G. Allen
Associate Director, Health Financing and
Public Health Issues

Robert H. Hast
Acting Assistant Comptroller General
Office of Special Investigations

Health Care Financing Administration Letter Dated May 21, 1999

Comments From the Health Care Financing Administration

GAO Contacts and Staff Acknowledgments

Carolyn Yocom, HEHS (202) 512-4931
William Hamel, OSI (202) 512-7433

Susan Anthony (Chicago)
Connie Peebles Barrow
Laura Sutton Elsberg

Andrew A. O'Connell

Ray Bush
Paul D. Shoemaker

Daniel Schwimer
Richard Burkard

(101866)

Table 1: States' Annual School-Based Claims, Ranked by Average
Claim per Medicaid-Eligible Child Aged 6 to 20 14

Table 2: Positions on Reimbursement for Medicaid School-Based Administrative
Activities of Those States That Do Not
Currently Pay Claims 19

Table 3: States' Medicaid School-Based Administrative Claims as a Percentage
of Total Medicaid Administrative Expenditures 20

Table 4: Incentives Affecting Volume and Cost of Services, by
Payment Approach 23

Table 5: Approaches to School-Based Payments in Seven States
Using Bundled Rates 24

Table 6: Amount and Percentage of Federal Medicaid
Reimbursement for Health Services and Administrative
Activities Retained by States 32

Table 7: Variations in Schools' Receipt of Medicaid Reimbursement
for Health Services 36

Figure 1: States Reporting Medicaid Claims for School-Based
Services, December 1999 13

Figure 2: Medicaid School-Based Administrative Claims for 10
States, Fiscal Years 1995-98 18
  

1. See Medicaid: Questionable Practices Boost Federal Payments for
School-Based Services (GAO/T-HEHS-99-148, June 17, 1999 ).

2. States can cover transportation services either as administrative
activities or as direct health services; thus, our selection of states
covered both these methods of submitting Medicaid claims.

3. States were asked to provide school-based claims data for the most recent
fiscal year for which they were available, which for approximately half the
states was state fiscal year 1999. Most of the remaining states provided
data for state fiscal year 1998, federal fiscal year 1998, or calendar year
1998; three states provided data for periods before July 1997.

4. For example, federal matching funds pay 90 percent of costs for the
development of automated information systems and 75 percent of costs for
some activities performed by skilled professional medical personnel.

5. IDEA, 20 U.S.C. 1400, covers public school children with disabilities and
emphasizes special education; it also covers such related services as
transportation, speech-language pathology and audiology, psychological
services, physical and occupational therapy, and counseling.

6. EPSDT is a benefit that provides certain comprehensive treatment and
preventive health care services for Medicaid-eligible children under age 21
if these services are medically necessary, regardless of whether they are
covered under a state's Medicaid plan. Under the EPSDT benefit, states are
required to conduct activities to inform individuals about EPSDT and to
encourage their participation in the Medicaid program.

7. Schools providing Medicaid services employ a variety of service delivery
models, including directly employing health providers, making contractual
arrangements with providers for specific services, operating fully equipped
and staffed school health clinics, or some combination thereof.

8. Other relevant provisions of the Medicaid statute and regulations include
sec. 1903(a) of the Social Security Act and implementing regulations at 42
C.F.R. 430.1 and 42 C.F.R. 431.15. In order for the costs of any
administrative activities to be allowable and reimbursable under Medicaid,
the activities must be "found necessary by the Secretary for the proper and
efficient administration of the plan."

9. See HCFA, Center for Medicaid and State Operations, Medicaid and School
Health: A Technical Assistance Guide (Washington, D.C.: HCFA, Aug. 1997).

10. HCFA's draft guidance can be located on the Internet at
http://www.hcfa.gov/ medicaid/schools/machmpg.htm.

11. In New York, schools actually claim targeted case management, which
differs from case management in that states are allowed to waive certain
Medicaid requirements. In other words, the state may target individuals by
different criteria, such as age, degree of disability, illness, or
condition.

12. Ten of the 17 states that allow reimbursement for school-based
administrative services were readily able to provide trend data: Alaska,
California, Florida, Illinois, Massachusetts, Michigan, Minnesota, Missouri,
Pennsylvania, and Texas.

13. As part of our survey on school-based services, states were asked
whether they were considering submitting Medicaid claims for school-based
administrative activities. States had the option of selecting "yes," "not
sure," or "no."

14. Of the 17 states that claim Medicaid reimbursement for school-based
administrative costs, we examined administrative expenditures for the 8
states that could readily provide data for multiple years and compared the
growth rates for school-based administrative expenditures against all of the
8 states' other Medicaid administrative expenditures. The eight states were
Alaska, California, Illinois, Michigan, Minnesota, Missouri, Pennsylvania,
and Texas. In Michigan and Minnesota, the base year for this calculation is
the year the states began claiming school-based administrative activities
and may not represent a full year of claims activity.

15. These states are Connecticut, Kansas, Maine, Massachusetts, New Jersey,
Utah, and Vermont. Although HCFA identified the District of Columbia and
North Carolina as having bundled rates, we did not include them in our
analysis. We eliminated the District of Columbia from our discussion because
it applies a bundled rate to only two schools; all other schools submit
claims on a fee-for-service basis. We excluded North Carolina because all of
its schools currently submit claims on a fee-for-service basis, although a
number of schools had previously used a bundled approach.

16. Services included in the bundled rates are relatively similar among the
seven states and typically include audiology; counseling; and physical,
speech, and occupational therapy. One notable exception is transportation,
the cost of which only four of the seven states include in their bundled
rates.

17. See Medicaid and Special Education: Coordination of Services for
Children With Disabilities Is Evolving (GAO/HEHS-00-20, Dec. 10, 1999 ).

18. New Jersey pays schools according to four categories: in-district
school, out-of-district school, nonpublic school, and state facility.

19. Thus, schools are reimbursed a lower amount for children in level one,
who receive fewer than 6 units of service a week, than for those in level
three, who receive from 12 to 24 units of service a week. Vermont's approach
also recognizes differences in the costs of services provided by aides and
professionals. For example, 1 hour of individual therapy provided by a
certified physical therapist is equal to three units of service, while an
hour of therapy provided by an aide equals one unit.

20. Of the 17 states that reimburse for administrative costs in schools,
school districts in 4--Alaska, California, Vermont, and Wisconsin--do not
include indirect costs in their claims.

21. In a few instances, school personnel may be completely allocated to
Medicaid administrative activities. For example, schools may employ
"Medicaid clerks," whose primary function is to provide the administrative
support necessary for schools to submit Medicaid claims to the state.

22. For representative period time studies, participants record all their
activities in 15-minute increments for a given period of time, typically 1
week. For random moment time studies, participants record their activities
for randomly selected moments in a specified period of time, such as a
federal fiscal quarter. In contrast, the continuous log approach requires
specified service providers to track how their time is spent on an ongoing
basis.

23. Five states--Florida, Illinois, Iowa, Missouri, and Washington--allow
more than one type of time study methodology.

24. The remaining six states that use a representative period time study
specify that the time period must be randomly selected. Minnesota and
Vermont, the two states that do not allow representative period time
studies, use random moment and continuous log studies, respectively.

25. School personnel completing an administrative claim time study allocate
their time to different categories, or activity codes, depending on the
activities performed in a given period of time. Activity codes are generally
not limited to Medicaid-reimbursable activities and may include codes for
educational activities and general administration.

26. For example, Medicaid-related activities might be one component of a
code that is widely used in education, such as staff training. Under these
circumstances, non-Medicaid activities could constitute a disproportionate
share of the total costs in one activity code, even if the code was
subsequently allocated between Medicaid and non-Medicaid costs. A more
appropriate approach for assigning costs would be to establish two activity
codes for training--one that identified all Medicaid-related training and
one that identified all other training.

27. HCFA regulations state that federal reimbursement rates in excess of 50
percent should apply only to those portions of the individual's work time
that are spent carrying out duties in the specified areas for which the
higher rate is authorized. The regulations further state that the allocation
of personnel and staff costs must be based on either the actual percentages
of time spent carrying out duties in the specified areas or another
methodology approved by HCFA. See 42 C.F.R. 432.50(c)(2), (3).

28. The time period of the claims for one group of school districts was the
quarter ending December 1998, and the time period for the remaining school
districts' claims was the quarter ending March 1999.

29. In these two states, overall SPMP claims for administrative expenditures
have increased four- and fivefold since the states began paying for
school-based administrative costs. With the exception of Iowa, whose claims
for SPMP activities increased twelvefold from 1994 to 1998, other states
that submitted administrative claims prior to 1998 had much lower increases.
We excluded California from our analysis because it reported significantly
less than $1 million in school-based administrative claims ($288,000).

30. Of the six states we visited, only Vermont did not reimburse a private
firm on a contingency basis. Instead, to develop its bundled approach,
Vermont used a firm that had been under contract with the state for several
years and was paid on a fixed-fee basis.

31. See 45 C.F.R. secs. 74.1(3), 74.27, 92.22.

32. See attachment B to OMB Circular A-87, Cost Principles for State, Local,
and Indian Tribal Governments (Washington, D.C.: OMB, revised 5/4/95, as
further amended 8/29/97).

33. Local funding as the source of a state's share of Medicaid reimbursement
is not unique to schools; it is most likely to exist when there are multiple
governmental entities involved in the delivery of Medicaid health services
or administrative activities. For example, local funds are being used as a
source of the state share of the cost of publicly funded hospitals and
mental health services.

34. This example assumes a 50-percent matching rate and that the claim
submitted is a legitimate statement of health services or administrative
activities performed in support of the Medicaid program.

35. Because the District of Columbia does not distinguish between state and
local funds, we excluded it from this analysis.

36. See app. I for the full text of the HCFA letter issued on May 21, 1999.
The letter addressed three areas. First, HCFA directed that bundled rates
for school-based health services that were previously evaluated and approved
by HCFA would no longer be acceptable for purposes of submitting a Medicaid
claim. Second, HCFA stated that it was conducting a review of practices to
develop administrative cost claims and that it expected to publish a guide
in the summer of 1999 to clarify the requirements for submitting claims for
Medicaid administrative activities in schools. Finally, HCFA informed states
that children with special education needs who ride the regular school bus
to school with children without disabilities should not have transportation
listed as part of their individualized plan and that the cost of that bus
ride should not be billed to Medicaid.

37. HCFA raised concerns that bundled rates could not be connected to a
specific type of procedure and were not available to other community
providers. Also, the agency said that schools did not maintain sufficient
documentation to establish the reasonableness of the bundled rates, and,
thus, Medicaid could be overpaying for certain services.

38. IDEA requires that, to the maximum extent possible, children with
disabilities be educated with children without disabilities and that special
classes, separate schooling, or other removal of children with disabilities
from the regular educational environment occur only when the nature or
severity of the disability of a child is such that education in regular
classes with the use of supplementary aides and services cannot be achieved
satisfactorily. See 20 U.S.C. 1412(a)(5)(A).
*** End of document. ***