Medicaid: Questionable Practices Boost Federal Payments for School-Based
Services (Testimony, 06/17/99, GAO/T-HEHS-99-148).

Pursuant to a congressional request, GAO discussed the rise in claims
for administrative costs associated with school-based health services,
focusing on: (1) trends in Medicaid's spending for administrative costs;
(2) the distribution of Medicaid payments for administrative claims to
schools and other entities; and (3) the adequacy of federal oversight in
approving school districts' claims for reimbursement.

GAO noted that: (1) over the past 4 years, school districts' claims for
administrative costs associated with school-based health services have
increased fivefold--from $82 million to $469 million--in 10 states for
which GAO could readily obtain data; (2) two of these states--Michigan
and Illinois--accounted for most of the increases in administrative cost
claims over this time period; (3) more school districts and additional
states have expressed interest in seeking Medicaid reimbursement for
health-related administrative activities in schools, suggesting that
claims will continue to rise; (4) the share of Medicaid payments for
school-based administrative activities received by the schools--as
opposed to other entities--varies by state; (5) at least four states
retain a portion of the federal funds obtained, whereas other states
return the entire federal share directly to the school districts; (6)
school districts often contract with private firms to perform the claims
development and reporting activities, and they pay these firms fees
ranging from 3 to 25 percent of the total amount of the federal Medicaid
reimbursement; (7) in one state GAO visited, some school districts,
after the state takes its share and the private firm is paid, receive
only $4 of every $10 that the federal government pays to reimburse
schools' Medicaid-allowable administrative costs; (8) federal oversight
of school districts' claims for administrative expense reimbursements
has been weak; (9) Health Care Financing Administration (HCFA) guidance
has been insufficient and its reviews of districts' claims activities
uneven; (10) as a result, what is submitted by states is approved by
some HCFA regional offices as an allowable administrative claim and is
denied by others as questionable or unallowable; and (11) these weak
controls permit an environment for opportunism in which inappropriate
claims could generate excessive Medicaid payments.

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

 REPORTNUM:  T-HEHS-99-148
     TITLE:  Medicaid: Questionable Practices Boost Federal Payments
	     for School-Based Services
      DATE:  06/17/99
   SUBJECT:  Children
	     Allowable costs
	     Program abuses
	     Health care services
	     Federal aid to states
	     Administrative costs
	     State-administered programs
	     Cost sharing (finance)
	     School districts
	     Internal controls
IDENTIFIER:  Medicaid Program
	     Early and Periodic Screening, Diagnosis, and Treatment
	     Program
	     Individuals With Disabilities Education Act Program
	     Illinois
	     Massachusetts
	     Michigan

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Cover
================================================================ COVER

Before the Committee on Finance, U.S.  Senate

For Release on Delivery
Expected at 2:00 P.M.
Thursday, June 17, 1999

MEDICAID - QUESTIONABLE PRACTICES
BOOST FEDERAL PAYMENTS FOR
SCHOOL-BASED SERVICES

Statement of William J.  Scanlon, Director
Health Financing and Public Health Issues
Health, Education, and Human Services Division

GAO/T-HEHS-99-148

GAO/HEHS-99-148T

(101833)

Abbreviations
=============================================================== ABBREV

  DSH - disproportionate share hospital
  EPSDT - Early and Periodic Screening, Diagnostic, and Treatment
     program
  HCFA - Health Care Financing Administration
  HHS - Department of Health and Human Services
  IDEA - Individuals With Disabilities Education Act
  OMB - Office of Management and Budget

MEDICAID:  QUESTIONABLE PRACTICES
BOOST FEDERAL PAYMENTS FOR
SCHOOL-BASED SERVICES
============================================================ Chapter 0

Mr.  Chairman and Members of the Committee: 

We are pleased to be here today as you explore potential
improprieties involving Medicaid claims for school-based health
services.  Because Medicaid is a federal-state program, the federal
government is responsible for paying a share of costs incurred by the
states to serve Medicaid's 40 million low-income beneficiaries,
including 19.7 million children.  For eligible children who receive
certain health services through their schools, states can use their
Medicaid programs to help pay for these services, which include
diagnostic screening and ongoing treatment.  Medicaid is also
authorized to reimburse schools' costs for performing administrative
activities associated with Medicaid's coverage of health services,
such as conducting outreach activities to enroll children in
Medicaid; providing eligibility determination assistance, program
information, and referrals; and coordinating and monitoring the
Medicaid-covered health services. 

Recently, concerns have been raised about the appropriateness of
states' efforts to claim Medicaid reimbursement for school-based
services.  Emerging practices appear to have some disturbing
similarities to other ï¿½creativeï¿½ financing mechanisms that began to
be used in the mid-1980s.  Some states used such mechanisms to
increase the federal Medicaid contributions they received without
increasing their own contribution.  As the nature and magnitude of
such mechanisms became apparent, the Congress acted on several
occasions to halt them.\1

Recent multimillion-dollar increases in Medicaid reimbursement for
school-based health services have triggered questions about the state
and federal procedures in approving and overseeing these growing
expenditures.  Specifically, your Committee asked that we examine the
rise in claims for administrative costs associated with school-based
health services.\2 Accordingly, my remarks will focus on (1) trends
in Medicaid's spending for administrative costs, (2) the distribution
of Medicaid payments for administrative claims to schools and other
entities, and (3) the adequacy of federal oversight in approving
school districts' claims for reimbursement.  My comments are based on
information collected over the past 2 months, at this Committee's
request, when we interviewed the 18 states identified as currently
claiming administrative costs.  We also visited three of these
statesï¿½Illinois, Massachusetts, and Michiganï¿½where we contacted
officials at federal and state agencies, school districts, and
private firms; analyzed data; and reviewed relevant documents.  We
also contacted officials of the Health Care Financing Administration
(HCFA), the agency within the Department of Health and Human Services
(HHS) responsible for administering Medicaid at the federal level. 

In summary, over the past 4 years, school districts' claims for
administrative costs associated with school-based health services
have increased fivefoldï¿½from $82 million to $469 millionï¿½in 10 states
for which we could readily obtain data.  Two of these statesï¿½Michigan
and Illinoisï¿½accounted for most of the increases in administrative
cost claims over this time period.  More school districts and
additional states have expressed interest in seeking Medicaid
reimbursement for health-related administrative activities in
schools, suggesting that claims will continue to rise. 

The share of Medicaid payments for school-based administrative
activities received by the schoolsï¿½as opposed to other
entitiesï¿½varies by state.  At least four states retain a portion of
the federal funds obtained, whereas other states return the entire
federal share directly to the school districts.  School districts
often contract with private firms to perform the claims development
and reporting activities, and they pay these firms fees ranging from
3 to 25 percent of the total amount of the federal Medicaid
reimbursement.  In one state we visited, some school districts, after
the state takes its share and the private firm is paid, receive only
$4 of every $10 that the federal government pays to reimburse
schools' Medicaid-allowable administrative costs. 

Federal oversight of school districts' claims for administrative
expense reimbursements has been weak.  HCFA guidance has been
insufficient and its reviews of districts' claims activities uneven. 
As a result, what is submitted by states is approved by some HCFA
regional offices as an allowable administrative claim and is denied
by others as questionable or unallowable.  These weak controls permit
an environment for opportunism in which inappropriate claims could
generate excessive Medicaid payments. 

--------------------
\1 See Medicaid:  States Use Illusory Approaches to Shift Program
Costs to Federal Government (GAO/HEHS-94-133, Aug.  1, 1994),
Medicaid:  Disproportionate Share Payments to State Psychiatric
Hospitals (GAO/HEHS-98-52, Jan.  23, 1998), and Michigan Financing
Arrangements (GAO/HEHS-94-146R, May 5, 1995).  See also the list of
related GAO products at the end of this statement. 

\2 Concerns have also been raised about (1) using a bundled rate to
pay for medical services provided to Medicaid-eligible children in
schools and (2) claims for school health-related transportation
services for children with disabilities.  On May 21, 1999, the Health
Care Financing Administration sent a letter to state Medicaid
directors to clarify policy on these two issues.  We do not address
those issues in this testimony. 

   BACKGROUND
---------------------------------------------------------- Chapter 0:1

Under Medicaid's federal-state partnership, states operate their
Medicaid programs within broad federal requirements and can elect to
cover a range of optional populations and benefits.  As a result,
Medicaid is essentially 56 separate programs (including the 50
states, the District of Columbia, Puerto Rico, and the U.S. 
territories).  Each program's respective federal and state funding
shares are determined through a statutory matching formula. 

As part of its responsibilities for Medicaid, HCFA reviews each
state's program for conformity with federal requirements.  HCFA's 10
regional offices are responsible for the direct oversight of the
respective state Medicaid programs within their jurisdiction, whereas
HCFA's central office sets federal Medicaid policy and works with the
regional offices on issues regarding state Medicaid policy and
administration. 

States submit claims to HCFA for Medicaid reimbursement generally
under two categories:  medical assistance payments and
administration.  Most Medicaid expenditures are for medical
assistance payments; the federal share of medical assistance payments
varies by state and ranges from 50 percent to 83 percent, based on
each state's per capita income in relationship to the national
average.  Nationally, the federal share of medical assistance
expenditures averaged about 57 percent in fiscal year 1998.  Of
Medicaid's $177 billion in total expenditures in fiscal year 1998,
administrative costs were approximately $8 billion, or 4.5 percent. 
For administrative activities, the federal share varies by the type
of costs incurred.  Most administrative expenditures are matched at a
fixed rate of 50 percent, making the federal government's
contribution equal to that of a state.  However, certain
administrative activities are matched above 50 percent; for example,
the development of automated systems is federally matched at a
90-percent rate.  In fiscal year 1998, the federal share of payments
for Medicaid's administrative costs averaged about 55 percent
nationwide. 

Medicaid is authorized to reimburse schools as qualified providers
for covered medical assistance services provided through (1) school
personnel, (2) other qualified practitioners with whom the school
contracts, or (3) a combination of these approaches.  School-based
Medicaid-covered services that qualify for federal funds include
physical, occupational, and speech therapy, as well as diagnostic,
preventive, and rehabilitative services.  Some services are provided
in conjunction with the Individuals With Disabilities Education Act
(IDEA) program;\3 others are included through a state's Medicaid plan
and are available through Medicaid's Early and Periodic Screening,
Diagnostic, and Treatment (EPSDT) program.\4

--------------------
\3 IDEA, 20 U.S.C.  1400, was first enacted in 1975.  It covers
children with disabilities in public schools and emphasizes special
education; it also covers such related services as transportation,
speech pathology and audiology, psychological services, physical and
occupational therapy, and counseling.  Medicaid has been authorized
to cover health services provided to children under IDEA through a
child's Individualized Education Plan or Individualized Family
Services Plan, provided the services are covered in the state's
Medicaid plan, or if medically necessary, through EPSDT.  Medicaid
funds have been available for IDEA services since the enactment of
the Medicare Catastrophic Coverage Act of 1988 (P.L.  100-360). 

\4 EPSDT is Medicaid's set of comprehensive and preventive health
care services to Medicaid-eligible children under age 21.  The EPSDT
program provides Medicaid coverage for any medically necessary
service, regardless of whether the service is covered in a state's
Medicaid plan. 

      MEDICAID'S REIMBURSEMENT OF
      SCHOOL-BASED ADMINISTRATIVE
      SERVICES
-------------------------------------------------------- Chapter 0:1.1

Medicaid is also authorized to reimburse schools for certain
administrative costs, even if the school has not provided any medical
assistance services.  Examples of such allowable administrative
activities include conducting outreach for Medicaid, helping
applicants complete Medicaid enrollment forms, and arranging
appointments with various providers of medical and screening
services.  Both IDEA and EPSDT have requirements to conduct
activities that would inform and encourage individuals to participate
in their benefits and services, and schools are considered a good
location for identifying Medicaid-eligible children, including those
with special needs. 

HCFA guidance states that, to claim reimbursement for administrative
costs, the schools must first identify the administrative activities
associated with providing the Medicaid-covered health services and
then determine their direct and indirect costs.\5

Different types of administrative activities can be totally,
partially, or not eligible for Medicaid reimbursement.  For some
administrative activities related to Medicaid-
eligible and noneligible children, the share of Medicaid eligibles
among all children is applied to the activities' costs, which are
claimed as Medicaid administrative costs.  In addition, time studies,
which track staff activities during a set period, are often used to
determine the allocation between Medicaid and non-Medicaid
administrative activities. 

For administrative costs to be claimed under Medicaid, they must be
specified in an approved cost allocation plan.\6 According to HCFA
guidance, a school district should develop its cost allocation plan
in concert with the state Medicaid agency, which in turn forwards the
plan to the responsible HCFA region for approval.  Subsequently, the
school district uses the approved plan as the basis for the cost
report it forwards to the state, which then forwards claims to HCFA
for Medicaid reimbursement. 

--------------------
\5 Direct costs are activities that can be identified with a specific
final cost objective, such as Medicaid administrative functions. 
Indirect costs are those incurred for a common or joint purpose that
cannot be readily assigned to a single cost objective. 

\6 Cost allocation plans must abide by the cost allocation principles
described in the Office of Management and Budget Circular A-87, which
requires, among other things, that costs be ï¿½necessary and
reasonableï¿½ and ï¿½allocableï¿½ to the Medicaid program. 

      PREVIOUS FINANCING
      MECHANISMS USED BY STATES
      AND LATER PROHIBITED IN LAW
-------------------------------------------------------- Chapter 0:1.2

The creative financing mechanisms that states began using in the
mid-1980s to maximize federal Medicaid contributions, without
effectively committing their own share of matching funds, took
various forms.  One involved using provider-specific tax revenues or
provider donations paid to the state being returned to the providers
with federal matching funds added.  Another mechanism involved
states' generating federal matching funds by increasing payment rates
for a particular group of public providers, such as nursing homes or
public hospitals.  However, these providers, through the use of
intergovernmental transfers, returned all or the majority of federal
and state funds to state treasuries.  Those practices that involved
hospitals contributed to an explosive increase in disproportionate
share hospital (DSH) payments made to hospitals that serve larger
proportions of low-income and Medicaid beneficiaries--from $1 billion
in 1990 to $17 billion in 1992.  Federal legislation in 1991 and 1993
banned certain of these practices and placed limits on allowable
reimbursable expenditures.  However, the legislation did not restrict
states' use of intergovernmental transfers. 

While these legislative actions significantly reduced the states' use
of these financing mechanisms, states continued to find innovative
ways to obtain additional federal funds.  More recently, some state
Medicaid programs were found to be making DSH payments to state
psychiatric hospitals that were far larger on average than payments
made to other types of local public and private hospitals.  Overall,
DSH payments to state psychiatric hospitals in six states we reviewed
averaged about $29 million per hospital compared with $1.75 million
for private hospitals.  Such payments enabled the states to obtain
federal matching funds to indirectly cover costs of services that
federal law prohibits Medicaid programs from covering.  In response
to this practice, the Balanced Budget Act of 1997 limited the
proportion of a state's DSH payments that can be paid to state
psychiatric hospitals. 

   MEDICAID CLAIMS FOR
   ADMINISTRATIVE EXPENDITURES
   HAVE INCREASED DRAMATICALLY IN
   SOME STATES
---------------------------------------------------------- Chapter 0:2

A growing number of school districts are making claims for Medicaid's
reimbursement of school-based administrative services.  From 1995 to
1998, Medicaid expenditures claimed for administrative activities
increased fivefold in the 10 states for which we could readily obtain
data.\7 (See fig.1.) Two of these statesï¿½Michigan and
Illinoisï¿½comprised the majority of the $387 million increase in
administrative expenditures from 1995 through 1998. 

   Figure 1:  Growth in Medicaid
   School-Based Administrative
   Claims for 10 States, FY
   1995-98

   (See figure in printed
   edition.)

Note:  State names in bold are those that began claiming school-based
administrative expenditures in the year listed. 

Source:  State-reported claims. 

Increases in Medicaid administrative expenditures claimed reflect a
growth in both the number of schools participating and the size of
claims submitted by individual school districts.\8 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 due primarily to an
increasing number of school districts submitting claims.  In
contrast, Illinois school districts, which have been claiming
Medicaid reimbursement since 1992, continue to identify additional
activities that they believe are appropriate for Medicaid
reimbursement.\9 Thus, increases in Illinois' expenditures between
1997 and 1998ï¿½from $89 million to $145 millionï¿½largely reflect
increased cost claims from school districts.\10

Barring any policy change, growth in Medicaid administrative cost
claims from schools is likely to continue.  Federal and state
officials reported to us that other states and school districts not
now making claims have expressed interest in obtaining Medicaid
reimbursement for health-related administrative activities in
schools.  Some state officials noted that they expect to expand their
claiming of costs in the near future and that they are now beginning
to develop procedures and methodologies to support such an expansion. 
Additionally, HCFA officials commented that several states are
interested in claiming Medicaid-related administrative costs but are
ï¿½waiting in the wingsï¿½ to ascertain whether HCFA will continue to
approve certain practices for claiming administrative costs. 

--------------------
\7 HCFA identified 18 states that make claims for the administrative
costs associated with school-based services.  Because Medicaid has no
separate benefit category for school-based services, not all states
were readily able to provide information on their administrative
expenditures for schools or school districts. 

\8 Administrative activities vary considerably in their content and
purpose, accounting, in part, for the differences in expenditures
across states.  For example, some states report that the
administrative activities claimed in schools primarily reflect
outreach efforts on behalf of EPSDT and other Medicaid benefits. 
Other states with school-based medical assistance services file
administrative costs related to the provision of medical services,
such as coordination and monitoring of health services and
interagency coordination. 

\9 Chicago public schools attributed increased Medicaid revenues to
additional staff training and development, legal assistance, and
claims reporting assistance. 

\10 Among the 10 states, Pennsylvania was the only state to have
steadily lowered its administrative claims expenditures; Missouri and
Texas expenditures remained relatively stable. 

   IN SOME STATES, MEDICAID FUNDS
   TO REIMBURSE SCHOOLS GO TO
   STATE TREASURIES AND PRIVATE
   FIRMS
---------------------------------------------------------- Chapter 0:3

Medicaid funds to reimburse schools for administrative activities are
distributed differently, depending on the state.  (See fig.  2.)

   Figure 2:  Two Approaches to
   School-Based Administrative
   Claiming

   (See figure in printed
   edition.)

Note:  Examples assume a federal share of 50 percent. 

For example, Arizona, Missouri, and Rhode Island provide all federal
funds to the schools, whereas at least four other states allocate a
portion of the federal reimbursement to their general revenue funds. 
Officials in two of these states said that, because state budgets
fund a portion of school activities, a school district's share of
federal reimbursement for administrative claims is, in principle,
partially funded by the state.  Under this reasoning, states believe
they are entitled to some share of the federal reimbursements claimed
by school districts.  The three states we visited kept some portion
of the federal share, ranging from 3 percent in Massachusetts to 40
percent in Michigan.  Federal dollars contributed about $1.5 million,
$8 million, and $47 million to the fiscal year 1998 revenues of
Massachusetts, Illinois, and Michigan, respectively.  Since Michigan
schools began claiming for administrative reimbursement in fiscal
year 1996, the state has retained close to $106 million of the
federal share. 

Some school districts employ private firms to facilitate their
efforts to claim Medicaid reimbursement.  These firms typically
receive as compensation a share of the revenues generated by the
claims.  By receiving a percentage rather than a fixed fee, these
firms have an incentive to maximize the amount of reimbursements
claimed.  Some school districts in the states we visited paid these
firms fees ranging from 3 percent to 25 percent of the federal
reimbursement amount, although most commonly, the fee paid was
between 9 and 12 percent.  One private firm is proposing to charge a
flat fee that is based on the fees it has charged historicallyï¿½which
were originally set as a percentage of a school district's federal
reimbursement received. 

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

   INSUFFICIENT HCFA GUIDANCE,
   UNEVEN OVERSIGHT HAVE LED TO
   QUESTIONABLE PRACTICES FOR
   CLAIMING REIMBURSEMENT
---------------------------------------------------------- Chapter 0:4

Insufficient guidance, combined with uneven oversight across HCFA
regions, has led to questionable billing practices by states and
inconsistent federal review of states' administrative claims for
school-based services.  HCFA has not provided clear or consistent
guidance to its regional offices regarding criteria for determining
reasonable costs or appropriate methods for claiming administrative
costs. 

What are submitted by states and approved or denied by HCFA regions
as allowable administrative costs vary widely.  In the absence of
specific direction from the HCFA central office, regional offices
interpreted and applied the available guidance inconsistently. 
Practices that HCFA has allowed in one state it has not allowed in
others, resulting in confusion for claimants and creating an
environment in which claimants are not discouraged from testing
questionable billing practices. 

      BROAD HCFA GUIDANCE LEAVES
      PAYMENT DETERMINATIONS
      LARGELY TO REGIONAL
      DISCRETION
-------------------------------------------------------- Chapter 0:4.1

HCFA's guidance on how school districts should allocate costs to
Medicaid is general to enable federal requirements to accommodate the
features of 56 individual Medicaid programs.  The burden of oversight
necessary to ensure that administrative costs are reasonable and
appropriately allocable to the Medicaid program falls to HCFA's 10
regional offices.  However, guidance to the regional offices has been
limited, leaving interpretation of policy and procedures up to each
office.  As a result, HCFA oversight of school-based administrative
cost claims has been uneven, resulting in case-by-case
determinations. 

Generally, HCFA directs states to follow federal requirements for
administrative cost allocation found in Office of Management and
Budget (OMB) Circular A-87, which establishes the principles and
standards for determining ï¿½reasonableï¿½ and ï¿½allocableï¿½ costs for
federal awards such as Medicaid.  In addition, the Medicaid statute
says that Medicaid methods of administration should be ï¿½found to be
necessary by the Secretary [of Health and Human Services] for proper
and efficient administrationï¿½ of a state's Medicaid program.\11

HCFA developed a technical assistance guide for states and school
districts to provide more detailed guidance on Medicaid requirements
associated with seeking payment for covered services (including
administrative claims) in school-based settings.\12 Essentially, the
guide echoes the requirements in OMB Circular A-87 and Medicaid
regulations while providing a few illustrations.  However, the guide
does not specify criteria that would permit the systematic
determination of what is reasonable and allocable to Medicaid. 

The HCFA regional offices have been unsuccessful in obtaining
decisive and consistent guidance from the agency's central office. 
For example, in 1997, a regional office requested assistance in
determining what was allowable for one state's administrative claims. 
Multiple discussions between the two HCFA offices did not produce
definitive answers.  In another instance, a regional office consulted
with the central office about deferring payment of a state's
administrative claims until the state provided additional supporting
documentation.\13 Instead, the regional office was told to pay the
state but perform a postpayment review of the claims.\14 In a similar
instance, another regional office deferred paying a state's
questionable claims at its own initiative because it did not believe
consultation was needed. 

--------------------
\11 Section 1902(a)(4)(A) of the Social Security Act. 

\12 See HCFA, Center for Medicaid and State Operations, Medicaid and
School Health:  A Technical Assistance Guide (Washington, D.C.: 
HCFA, Aug.  1997). 

\13 According to federal Medicaid regulations at 42 C.F.R.  430.40
(b), HCFA may defer a claim when it is unable to determine, on the
basis of available documentation, whether a claim should be allowed. 

\14 In contrast to a deferral, a postpayment review retroactively
reviews practices to ensure that the claims paid were allowable. 

      HCFA OVERSIGHT FAILS TO
      DISCOURAGE SUSPECT BILLING
      PRACTICES
-------------------------------------------------------- Chapter 0:4.2

Without specific guidance, federal determinations of the
appropriateness of administrative claiming practices are
inconsistent, permitting the approval of claims that in some cases
may be suspect.  Some regions have conducted very prescriptive
approaches to administrative cost claiming; others have been more
ï¿½hands off.ï¿½ In those regions that have been ï¿½hands off,ï¿½ some states
have tested the limits of reasonable and allowable standards,
potentially maximizing Medicaid reimbursement inappropriately. 

In our discussions with five regional offices, we found that their
approval varied regarding states' approaches to allocating
administrative costs to Medicaid.  We found only one instance in
which a HCFA region had been involved in the initial design of a
state's cost allocation method.  In other cases, state Medicaid
agencies met with the regional offices for a ï¿½courtesy visitï¿½ to
present their finalized cost allocation methods.  In still other
cases, the regional offices had no knowledge of a cost allocation
plan in advance of a state's submission of administrative claims.  In
these cases, some regional offices deferred payments, others
consulted with the central office about deferment, and still others
paid the claims without further review. 

We found that regional offices varied in their response to the use of
various cost allocation practices that some school districts employ
to enhance the amounts of Medicaid reimbursement claimed.  The
following are examples: 

  -- Two regional offices found instances in which school personnel
     charged to Medicaid 100 percent of their activities, only a
     portion of which were health-related.  In response, one of the
     regional offices identified and deferred over $33 million in
     inappropriate claims, while the other has proposed a deferral to
     HCFA's central office.  In contrast, another regional office
     found similar instances of inappropriately billed activities but
     reported to us taking no action that resulted in changes on the
     part of the claimants. 

  -- In two instances within one region, private firms designed
     activity code definitions for outreach activities that claimed
     100-percent reimbursement from Medicaid,even though the
     activities were performed for services associated with other
     programs, such as WIC\15 and Food Stamps.  Other HCFA regions
     disapproved these same outreach activities when claimed by
     states in their jurisdiction. 

  -- The HCFA regional offices vary in their treatment of
     administrative activities performed by skilled professional
     medical personnel, which, under certain conditions, can be
     matched at a 75-percent rate.\16 Where an enhanced matching rate
     was allowed, claims may have been overstated because, counter to
     Medicaid regulations, no distinction was made between skilled
     and unskilled activities.  Two HCFA regions disallowed an
     enhanced matching rate altogether, with one stating that ï¿½there
     was no way in the worldï¿½ to document that certain activities
     required a skilled level of performance. 

  -- In one instance, a consortium of school districts used a
     sampling methodology for identifying Medicaid-eligible children
     that did not include sampling data from all the school districts
     in the consortium.  To the extent that lower-income school
     districts were overrepresented using this method, the inflated
     estimate of the proportion of Medicaid-eligible children
     increases the amount of Medicaid reimbursement for the
     consortium's administrative claims. 

--------------------
\15 WIC, or the Special Supplemental Nutrition Program for Women,
Infants, and Children is a federally funded nutrition assistance
program that provides lower-income pregnant and postpartum women,
infants, and children up to age 5 with supplemental foods, nutrition
counseling, and access to heath care services. 

\16 An enhanced matching rate of 75 percent is available for
administrative activities performed by skilled professionals only if,
among other things, they (1) have the appropriate credentials and (2)
perform an activity that requires professional medical knowledge and
skills.  Hypothetically, a physical therapist would be eligible for
the enhanced rate for time spent coordinating medical services but
would be expected to claim at the 50-percent matching rate for time
spent photocopying. 

   CONCLUDING OBSERVATIONS
---------------------------------------------------------- Chapter 0:5

Close to one-half of Medicaid-eligible individuals are children,
making schools an important arena for Medicaid services.  Even for
schools that do not directly provide Medicaid services,
administrative activities can help identify, refer, screen, and
enroll eligible children for appropriate, covered services.  Outreach
and identification activitiesï¿½in many and varied settingsï¿½help ensure
that the nation's most vulnerable children receive routine preventive
health care or ongoing primary care and treatment. 

In stepping into this arena, however, some school district and state
practices appear intent on maximizing their receipt of Medicaid funds
through suspect financing mechanisms.  Without additional guidance
and consistent oversight by HCFA, many school districts with minimal
knowledge of Medicaid and its billing requirements have chosen to
contract with private firms.  This places these firms ï¿½in the
driver's seat,ï¿½ where they design the methods to claim administrative
costs, train school personnel to apply these methods, and submit
administrative claims to the state Medicaid agencies to obtain the
federal reimbursement that provides the basis for their fees. 

Embedded in this process are incentives for both the states and
private firms to maximize Medicaid reimbursements.  By being able to
capture a share of the school district's federal payments, states and
private firms are motivated to experiment with ï¿½creativeï¿½ billing
practices.  At the same time, the treatment of these practices by
some of HCFA's regional offices fails to adequately safeguard
Medicaid dollars. 

Striking a balance between the stewardship of Medicaid funds and the
need for flexible approaches to ensure the coverage and treatment of
eligible children is difficult.  HCFA is in a position to explore
policies and practices in partnership with statesï¿½and both have a
fiduciary responsibility to administer Medicaid efficiently and
effectively.  Growing claims for school-based administrative services
call for prompt attention by the federal government and the states. 

-------------------------------------------------------- Chapter 0:5.1

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

   GAO CONTACT AND ACKNOWLEDGMENTS
---------------------------------------------------------- Chapter 0:6

For future contacts regarding this testimony, please call William J. 
Scanlon at (202) 512-7114.  Key contributors to this testimony
include Carolyn L.  Yocom, Susan T.  Anthony, Connie Peebles Barrow,
and Victoria M.  Smith. 

RELATED GAO PRODUCTS
=========================================================== Appendix 1

Medicaid:  Disproportionate Share Payments to State Psychiatric
Hospitals (GAO/HEHS-98-52, Jan.  23, 1998). 

Medicaid:  Disproportionate Share Hospital Payments to Institutions
for Mental Diseases (GAO/HEHS-97-181R, July 15, 1997). 

State Medicaid Financing Practices (GAO/HEHS-96-76R, Jan.23, 1996). 

Michigan Financing Arrangements (GAO/HEHS-95-146R, May 5, 1995). 

Medicaid:  States Use Illusory Approaches to Shift Program Costs to
Federal Government (GAO/HEHS-94-133, Aug.  1, 1994). 

*** End of document. ***