Medicaid in Schools: Poor Oversight and Improper Payments Compromise
Potential Benefit (Testimony, 04/05/2000, GAO/T-HEHS/OSI-00-87).

Pursuant to a congressional request, GAO discussed the issue of Medicaid
expenditures for school-based health services and administrative costs,
focusing on the: (1) magnitude of states' claims for school-based health
services and administrative activities; (2) appropriateness of the
methods used to determine how much Medicaid pays for these services; (3)
extent to which school districts directly benefit from federal Medicaid
reimbursements; and (4) the adequacy of the Health Care Financing
Administration's (HCFA) oversight of school-based claims.

GAO noted that: (1) despite growing expenditures for school-based
Medicaid services and activities, the potential benefits to schools and
the children they serve are being compromised by poor HCFA guidance and
oversight and by improper payments that divert public funding from its
intended purpose; (2) in total, 47 states and the District of Columbia
have reported $2.3 billion in Medicaid expenditures for school-based
activities for the latest year for which they have data; (3) although
this spending level reflects a small share of total Medicaid
expenditures, more schools are expressing interest in availing
themselves of Medicaid as a source of funds, especially to reimburse
administrative activities, which creates the potential for continuing
expenditure growth; (4) methods used by some school districts and states
to claim Medicaid reimbursement for school-based services lack
sufficient controls to ensure that these are legitimate claims; (5)
bundled payment methods that seven states use to pay for 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; (6) poor guidance and oversight have resulted in
improper payments in at least 2 of the 17 states that allowed schools to
submit claims for administrative activities costs; (7) despite the
significant level of Medicaid payments for school-based services in some
states, school districts may receive little in direct reimbursements
because of certain funding arrangements among schools, states, and
private firms contracting with them; (8) some school districts may pay
private firms up to 25 percent of their federal Medicaid reimbursement;
(9) these firms often help schools develop claiming methodologies, train
school personnel to apply these methods, and submit the claims for
reimbursement; (10) as a result of these arrangements, schools may end
up with as little as $7.50 for every $100 claimed; (11) these funding
arrangements can create reduced incentives for appropriate program
oversight and an environment for opportunism that drains funds away from
their intended purposes; (12) HCFA has historically provided little or
inconsistent direction and oversight of Medicaid reimbursements for
school-based claims, which has contributed to the problems GAO
identified; and (13) HCFA has recently focused more attention on these
issues by reviewing the claims for school-based administrative
activities by at least one regional office and developing a draft
school-based administrative claiming guide.

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

 REPORTNUM:  T-HEHS/OSI-00-87
     TITLE:  Medicaid in Schools: Poor Oversight and Improper Payments
	     Compromise Potential Benefit
      DATE:  04/05/2000
   SUBJECT:  Health care services
	     Administrative costs
	     State-administered programs
	     Health insurance
	     School districts
	     Internal controls
	     Allowable costs
	     Federal/state relations
	     Children
	     Erroneous payments
IDENTIFIER:  Medicaid Program

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

Wednesday, April 5, 2000

GAO/T-HEHS/OSI-00-87

medicaid in schools

Poor Oversight and Improper Payments Compromise Potential Benefit

        Statement of Kathryn G. Allen, Associate Director,

Health Financing and Public Health Issues, and

Robert H. Hast, Acting Comptroller General for Special Investigations

Testimony

Before the Committee on Finance, U.S. Senate

United States General Accounting Office

GAO

Medicaid in Schools: Poor Oversight and Improper Payments Compromise
Potential Benefit

Mr. Chairman and Members of the Committee:

We are pleased to be here today as you address the issue of Medicaid
expenditures for school-based health services and administrative costs.
Because Medicaid is a federal-state partnership, the federal government is
responsible for paying a share of costs incurred by the states to serve
Medicaid's 41 million low-income beneficiaries, including 13 million
school-aged children. Medicaid helps finance certain health services that
eligible children, including those with disabilities, receive in schools,
such as diagnostic screening and physical therapy. Medicaid is also
authorized to reimburse schools' costs for performing certain administrative
activities, such as conducting outreach to help enroll children in Medicaid
and providing referrals to qualified providers.

In June 1999, we testified before your Committee about multimillion-dollar
increases in Medicaid reimbursements for administrative activities in 10
states and the need for more federal and state oversight of these growing
expenditures. At that time, we found that weak and inconsistent control over
the review and approval of claims for school-based administrative activities
created an environment in which inappropriate claims could result in
excessive Medicaid reimbursements. You subsequently asked us to expand our
analysis of Medicaid reimbursement of school-based administrative activities
and to examine states' use of "bundled" rates for school-based health
services. Our remarks are based on our report being issued today and will
focus on (1) the magnitude of states' claims for school-based health
services and administrative activities, (2) the appropriateness of the
methods used to determine how much Medicaid pays for these services, (3) the
extent to which school districts directly benefit from federal Medicaid
reimbursements, and (4) the adequacy of the Health Care Financing
Administration's (HCFA) oversight of school-based claims.

Our findings are based on a survey of all 50 states and the District of
Columbia; work in 7 states that HCFA identified as paying for health
services using a bundled, rather than a fee-for-service, approach; and work
in 17 states we identified as submitting claims for administrative
activities. We also conducted investigative work in two states where we
identified abusive or potentially fraudulent practices associated with
claims for administrative activities or fee-for-service health payments.

In summary, despite growing expenditures for school-based Medicaid services
and activities, the potential benefits to schools and the children they
serve are being compromised by poor HCFA guidance and oversight and by
improper payments that divert public funding from its intended purpose. In
total, 47 states and the District of Columbia have reported $2.3 billion in
Medicaid expenditures for school-based activities for the latest year for
which they have data. Although this spending level reflects a small share of
total Medicaid expenditures, more schools are expressing interest in
availing themselves of Medicaid as a source of funds, especially to
reimburse administrative activities, which creates the potential for
continuing expenditure growth.

Payment for covered services for Medicaid-eligible children is not at issue.
But methods used by some school districts and states to claim Medicaid
reimbursement for school-based services lack sufficient controls to ensure
that these are legitimate claims. For example:

   * Bundled payment methods that seven states use to pay for 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. HCFA last year banned the use of
     bundled rates because of concerns about their development and use.
     However, we believe that it would be better for HCFA to work with
     states and schools to build in these missing assurances rather than to
     ban the use of bundled rates altogether.
   * Poor guidance and oversight have resulted in improper payments in at
     least 2 of the 17 states that allowed schools to submit claims for
     administrative activities costs. Our work in Michigan alone identified
     $28 million in federal reimbursement for improper payments for
     administrative activity claims over 2 recent years. The lack of
     effective controls in other states could allow comparable improprieties
     to occur elsewhere.

Despite the significant level of Medicaid payments for school-based services
in some states, school districts may receive little in direct reimbursements
because of certain funding arrangements among schools, states, and private
firms contracting with them. Seven states retain from 50 to 85 percent of
federal reimbursement for Medicaid school-based claims. In addition, some
school districts may pay private firms up to 25 percent of their federal
Medicaid reimbursement. These firms often help schools develop claiming
methodologies, train school personnel to apply these methods, and submit the
claims for reimbursement. As a result of these arrangements, schools may end
up with as little as $7.50 for every $100 claimed. These funding
arrangements can create reduced incentives for appropriate program oversight
and an environment for opportunism that drains funds away from their
intended purposes.

HCFA has historically provided little or inconsistent direction and
oversight of Medicaid reimbursements for school-based claims, which has
contributed to the problems we have identified. For example, some HCFA
regional offices allowed payments to be made without approving the methods
proposed by some states to claim reimbursement for administrative
activities. HCFA has recently focused more attention on these issues by
reviewing the claims for school-based administrative activities by at least
one regional office and developing a draft school-based administrative
claiming guide. However, states are still awaiting further guidance on
bundled rates and allowable transportation costs for children with special
needs.

We are making recommendations to the Administrator of HCFA aimed at
improving the development and consistent use of clear policies and
appropriate oversight for school-based Medicaid services. HCFA generally has
agreed with our findings and is already taking steps to respond to these
recommendations. We are also making referrals to the U.S. Attorney's Offices
for those instances in which we have uncovered evidence of inappropriate and
potentially fraudulent claims.

Background

Schools can help identify, enroll, and provide Medicaid services to eligible
low-income children, 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 Medicaid-eligible children under the Individuals With
Disabilities Education Act (IDEA). In particular, IDEA obligates schools to
identify and provide the "related services" that are required to help a
child with a disability benefit from special education, including
transportation, speech therapy, and physical and occupational therapy.
Because some services required to address the specific needs of a child with
a disability are health-related, Medicaid is an attractive option for
funding health-related IDEA services for Medicaid-eligible children.

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 the state and must
have a provider agreement with the state Medicaid agency. Payment rates are
established by the state Medicaid agency and described in a state plan that
is 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.

Until recently, states have been allowed to develop methods to create
bundled payments for a specified group of services, which in most instances
means a fixed payment for all services a child receives during a set period
of time, such as a day or month. However, in a May 21, 1999, letter to state
Medicaid directors, HCFA prohibited states' use of this approach, having
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 and 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, states with approved bundled rates continue to use them.

Schools may also receive reimbursement for the costs of performing
administrative activities related to Medicaid, such as 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 the school district and (2) an acceptable reimbursement methodology for
calculating allowable costs of administrative activities. States must abide
by the cost allocation principles described in Office of Management and
Budget Circular A-87, which requires, among other things, that costs be
"necessary and reasonable" and "allocable" to the Medicaid program.

In August 1997, HCFA issued a technical assistance guide for Medicaid claims
for school-based services that provides general guidelines regarding
Medicaid reimbursement for the costs of school health services and
administrative activities. More recently, HCFA's May 21, 1999, letter to
state Medicaid directors, in addition to addressing bundled rates, also
attempted to clarify several policies, including payments for transportation
for children with disabilities. The letter stated that HCFA was in the
process of updating its guiding principles related to claims for
school-based administrative activities costs. In February 2000, HCFA issued
for comment a new draft technical assistance guide aimed at clarifying
guidance for submitting school-based administrative claims.

Medicaid School-Based Activities Involve a Variety of Practices Across
States

Schools in 47 states and the District of Columbia obtain Medicaid payment to
some degree for school-based health services, administrative activities, or
both. These payments totaled $2.3 billion for the latest year for which data
were available. Medicaid payments to schools ranged from a high of $820 per
Medicaid-eligible child in Maryland to about 5 cents per Medicaid-eligible
child in Mississippi. Figure 1 shows the 19 states, and the District of
Columbia, with the highest average expenditures per Medicaid-eligible child
for school-based services. (App. I provides more detail on school-based
claims for all states.)

Figure 1: Highest Average Claims Per Medicaid-Eligible Child (19 States and
the District of Columbia)

The majority of Medicaid payments-about $1.6 billion-were for health
services provided by schools in 45 states and the District of Columbia, and
about $712 million were for administrative activities billed by schools in
17 states. Although schools in 17 states submit claims for reimbursement of
Medicaid-related administrative activities, 2 states-Michigan and
Illinois-accounted for 74 percent of all school-based administrative
activity payments. (See fig. 2.)

Figure 2: $2.3 Billion Claimed for School-Based Medicaid Reimbursement

Source: GAO survey of states.

The school-based administrative claims of a few states have grown rapidly
and now constitute a significant share of these states' total administrative
costs for all Medicaid program activities. For example, school-based claims
represented 47 percent and 46 percent of total Medicaid administrative
claims for Michigan and Illinois, respectively. Other states-Alaska,
Arizona, and Washington-had school-based claims representing about 20
percent of their total Medicaid administrative expenditures. (See table 1.)
Alaska, Illinois, Michigan, and Minnesota each showed average annual growth
rates for school-based administrative expenditures that were at least twice
as high as the growth rate of other Medicaid administrative expenditures .

Table 1: States' Medicaid School-Based Administrative Claims as a Percentage
of Total Medicaid Administrative Expenditures

                 School-based
                 Medicaid         Total Medicaid    Percentage of total
 State           administrative   administrative    administrative
                 claims (in       expenditures (in  expenditures
                 thousands)       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 provided administrative claims data for school-based services
from the most recent fiscal year for which data were available. Most states
provided data from the year ending June 30, 1999, while 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).

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

b Washington provided school-based administrative claims data for the year
ending August 31, 1999, and total Medicaid administrative expenditures for
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.

Certain Methods Used to Claim Medicaid Reimbursement Lack Sufficient
Controls

Some methods used to claim Medicaid reimbursement do not adequately ensure
that health services are provided or that administrative activity costs are
properly identified and reimbursed. Bundled payment methods used to claim
Medicaid reimbursement may lack sufficient controls to ensure that health
services paid for are actually provided and may not differentiate levels of
need among children. In addition, our investigation of fee-for-service
payments for health services in one state also identified inappropriate
practices that resulted in improper payments by Medicaid. Similarly, poor
controls over what constitutes an allowable administrative activity have
resulted in millions of dollars of improper Medicaid reimbursements.

Some States' Bundled Payment Methods for Health Services Lack Sufficient
Accountability

Table 2: Approaches to School-Based Payments in Seven States Using Bundled
Rates

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

 Connecticut  No-one statewide     Monthly rate-$336     Receipt of one
              rate                 per child             service
              Yes-14 statewide
              rates; vary          Monthly
 Kansas                            rate-$151-$636 per    School attendance
              by primary                                 1 day a month
              disability           child
              Yes-13 statewide
              rates; vary          Monthly
 Maine                             rate-$141-$442 per    School attendance
              by primary                                 1 day a month
              disability           child
              Yes-seven statewide  Six daily
              rates;               rates-$11-$48 per
 Massachusetts                     child;                School attendance
              vary by time spent
              in a regular         one weekly rate-$106
              classroom            per child
              Yes-four statewide
 New Jersey   rates; vary          Daily rate-$33-$172   Receipt of one
                                   per child             service
              by type of school

 Utah         No-school-specific   Daily rate-$21-$60    School attendance
              rates                per child
              Yes-four statewide
              rates; vary          Monthly
                                                         Receipt of a
 Vermont                           rate-$162-$1,598 per  specified number
              by number of
              services actually    child                 of services
              provided

a States may exclude certain services, such as development and evaluation of
the individualized plan of a child with a disability; the receipt of Early
and Periodic Screening, Diagnostic, and Treatment services; and provision of
medical equipment, from their bundled rates and separately claim Medicaid
reimbursement for these services.

b For 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.

States do not always adjust bundled rate payments for children with
different medical needs. For example, Connecticut pays the same bundled rate
to all participating schools for each eligible child, regardless of whether
that child has a mild learning disability or multiple physical and cognitive
disabilities. The single 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 Massachusetts and New Jersey, the payment levels vary depending on
the location of the child, such as the classroom type or school in which a
child is enrolled, and not necessarily on the number or scope of services
provided. To a greater extent, the bundled rates in Kansas, Maine, and
Vermont vary among children with different levels of need and are thus
aligned more closely to the expected costs 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. 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 addition, states' bundled approaches may not provide adequate assurance
that services paid for are actually provided. Payments in 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 paid the bundled rate for each
eligible child, irrespective of whether the child has received any services.
Better assurances that services are actually provided to eligible children
exist in Connecticut, New Jersey, and Vermont. Schools in Connecticut and
New Jersey must document services provided to each child to obtain the full
bundled payment. In Vermont, case managers complete for each child a
level-of-care form that describes the amount and scope of services provided,
which determines which one of four payment levels the school receives.

Investigation Identified Improper Fee-for-Service Health Claims

For Administrative Activity Claims, Poor Controls Have Resulted in Improper
Reimbursement

With regard to administrative activities, poor controls have resulted in
improper payments in at least 2 of the 17 states that allowed schools to
claim such costs, and the similar lack of effective controls in other states
could allow comparable improprieties to occur.

   * In Michigan, the HCFA Chicago regional office questioned $30 million in
     administrative claims for activities not clearly related to Medicaid,
     for the quarter ending September 1998. School staff interviewed by HCFA
     revealed that activities they performed, related to general health
     screenings, family communications, or training, had no Medicaid
     component or benefit, although a portion of staff time was claimed and
     reimbursed as such. The HCFA regional office subsequently deferred a
     $33 million claim made for the quarter ending September 1999, again
     asking the state to better document that the activities were clearly
     linked to Medicaid. We identified similar practices for submitting
     administrative claims in as many as seven other states.
   * Our investigation and HCFA scrutiny of claims in Michigan and Illinois
     identified administrative cost claims, submitted and paid, for
     activities performed for the benefit of non-Medicaid-eligible children,
     including administrative costs related to health reviews and
     evaluations that specifically excluded Medicaid-eligible children for
     whom separate claims were submitted as direct services. Our work in
     Michigan alone identified $28 million in federal reimbursement for
     improper payments for administrative activity claims over 2 recent
     years.
   * In Illinois and Michigan, on the advice of private firms, school
     districts have submitted claims that inadequately document the need to
     have skilled medical personnel involved in certain administrative
     activities. When such personnel are involved, the federal government
     reimburses schools 75 percent rather than 50 percent for the
     administrative activities they perform. For recent school-based
     administrative activity claims in Illinois, activities performed by
     skilled medical personnel totaled $16.6 million, or 37 percent of the
     state's total claims, for one quarter for participating school
     districts. In Michigan, this type of claim totaled $14 million, or 25
     percent of its total administrative activity for all participating
     school districts, for the quarter ending September 1998.

In Some States, Schools Receive a Small Portion of Medicaid Reimbursement

Rather than fully reimbursing schools for their Medicaid-related costs,
eighteen states retain from 1 to 85 percent of federal Medicaid
reimbursements (see table 3). According to several state officials, because
states fund a portion of local education activities, Medicaid services
provided by schools are partially funded by the state. Under 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 that the states fund. Moreover,
we believe that such a practice severs the direct link between Medicaid
payment and services delivered, increases the potential for the diversion of
Medicaid funds to purposes other than those intended, and is inconsistent
with the program's fundamental tenet that federal dollars are provided to
match state or local dollars to provide services to eligible individuals.

Table 3: Federal Medicaid Reimbursement Retained by States

                   Percentage of federal
                   reimbursement retained
                                                   Amount retained by
 State             Health services  Administrative state (in
                                    activities
                                                   thousands) a
 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

a 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 from before July 1, 1997.

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

c Washington 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.

d When 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.

In addition, some school districts pay private firms fees ranging from 3 to
25 percent of the federal reimbursement amount claimed, with fees most
commonly ranging 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.

Finally, school districts' funds often are used to supply the state's share
of Medicaid funding for school-based claims. In these cases, the maximum
additional funding that a school district can receive is what the federal
government contributes. This is substantially less than what a private
sector Medicaid provider would receive for delivering similar services. 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 in those
states with equal matching between federal and state sources. Given the
source of the states' share of funding, states' policies to retain portions
of the federal reimbursement, and schools' contingency fee arrangements with
private firms, the net amount of federal funds returned to a school district
varies considerably. As shown in figure 3, a school district may receive as
much as $100 in Minnesota to as little as $7.50 in New Jersey in federal
Medicaid reimbursement for every $100 spent to pay for services and
activities performed in support of Medicaid-eligible children.

Figure 3: Some School Districts Receive Little Federal Medicaid
Reimbursement

Note: For Illinois, when total payments to a 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. In Florida, effective
February 14, 2000, contingency fee reimbursement contracts are prohibited
for school districts.

Source: GAO analysis of state data.

In addition to affecting the payment a school ultimately receives, these
funding arrangements may create adverse incentives for program oversight.
Because states can benefit directly from higher federal payments, states'
incentives to exercise strong oversight over the propriety of school-based
claims can be diminished. Similar questions are raised about the incentives
of private firms that are paid a share of schools' Medicaid reimbursement.
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.

HCFA Oversight Does Not Consistently Ensure the Appropriateness of
School-Based Claims

While HCFA has made some recent efforts to improve oversight of Medicaid
school-based claims, efforts to date have not consistently ensured the
appropriateness of these claims. For example, 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. The work
group that HCFA created to explore alternatives to bundled rates included
representatives from the Department of Education and some states; this group
is currently inactive, and all seven states that were using a bundled
approach before HCFA's May 1999 letter continue to do so while they await
further guidance.

With regard to administrative activity claims, some HCFA regional offices
have had little or no involvement in the development of states'
methodologies for developing administrative claims, while other regional
offices have worked in concert with states to develop these methodologies.
Moreover, contradictory policies exist across the regional offices regarding
when states may obtain the 75-percent enhanced matching rate for skilled
medical providers performing administrative services. We found that
different regional offices (1) allow an enhanced match, (2) completely
disallow the practice, or (3) specifically review the use of the enhanced
match to ensure its appropriateness. Finally, HCFA's attempt to clarify its
policy on specialized transportation has resulted in inconsistency and
confusion. Only one of the seven regional offices that we spoke with
correctly understood that Medicaid will cover transportation costs if a
child is able to ride on a regular school bus but requires the assistance of
an aide. Two regional offices incorrectly believed that such costs would not
be reimbursed, while four did not know whether reimbursement would be
allowed.

HCFA has taken some steps to improve oversight of school-based claims. One
regional office recently conducted a review of one state's practices,
identified cases of improper payments, issued deferrals of claims, and is
now working with a few states to revise their practices to more accurately
capture the costs associated with Medicaid administrative activities in
schools. Guidance that HCFA testified in June 1999 would be forthcoming was
released for public comment in February 2000.

Conclusions and Recommendations

HCFA has a critical role in this process. It must set the proper course by
providing consistent policy guidance and then facilitating its
interpretation and implementation across the many states and school
districts that are already participating in the Medicaid program or will in
the future. HCFA generally agreed with our findings and is already taking
steps to respond to the recommendations set forth in our report, which
address the need to

   * better ensure that bundled rates for health services provide for
     children's varying levels of need and that services paid for were
     provided,
   * provide consistent guidance for and monitoring of allowable
     administrative activities, and
   * clarify policy on allowable specialized transportation costs for
     children with disabilities.

HCFA also expressed its commitment to work with its partners in the
education community and states to address these issues in a consistent yet
flexible fashion to ensure that Medicaid dollars are used only on behalf of
Medicaid-eligible children for Medicaid-covered services. At the same time,
the states also have an important role in this program. They share with HCFA
the fiduciary responsibility to administer the Medicaid program efficiently
and effectively and must also be held accountable for safeguarding public
dollars while providing services to which beneficiaries are entitled.

A program of the magnitude and diversity of Medicaid-with its broad range of
program goals, policymakers, providers, and beneficiaries at the federal,
state, and local levels-will always present demanding challenges in terms of
finding the appropriate balance between state flexibility and public
accountability. The emergence of these issues associated with school-based
services is just the latest example of the need for constant vigilance to
guard against potential exploitation that would divert limited resources
from their intended purposes. We are committed to continuing to work with
this Committee and HCFA to help address these important issues.

GAO Contacts and Acknowledgments

Appendix: States' Annual School-Based Claims, Ranked by Average Claim Per
Medicaid-Eligible Child Aged 6 to 20
                                   School-based claims (in thousands)
                 Average claim per Total       Health      Administrative
 State           Medicaid-eligible
                 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.

a This state did not report school-based claims.

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

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

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

e The 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).

(201051)

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