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**RSC Policy Brief:**

**Medicaid and the States**

*April 2, 2008*

**In light of potential regulatory and legislative actions designed to
make adjustments to Medicaid's joint state-federal financing mechanism,
the RSC has prepared the following policy brief analyzing several
elements of the various policy proposals.**

**[Executive Summary]{.underline}**: The Centers for Medicare and
Medicaid Services (CMS) has issued several proposed regulations
concerning various issues relating to federal reimbursement of certain
Medicaid services. Although the proposed regulations address state
financing arrangements that government reports have questioned for
decades, the Democratic Congress passed moratoria prohibiting CMS from
issuing final regulations. Many conservatives may be wary of any further
legislative efforts to override the proposed regulations---or to provide
a temporary increase in the federal Medicaid match in an economic
"stimulus" bill---as encouraging states to engage in questionable
funding schemes and poor financial planning, resulting in significantly
higher outlays for the federal government.

**[Background]{.underline}**: The Medicaid program, enacted in 1965,
serves as a federal-state partnership providing entitlement health care
coverage to certain low-income and disabled populations. Federal funding
for the program is provided on a matching basis, according to a Federal
Medical Assistance Percentage (FMAP) formula established in statute.

Because of the nature of the federal match, states have for some time
created mechanisms designed to maximize the federal share of spending on
Medicaid services. In 1991, Congress passed legislation (P.L. 102-234)
designed to restrict Medicaid provider taxes, as states were collecting
funds from providers, then rebating those funds back to the providers
once the states had utilized the taxes collected to capture additional
federal matching funds. The 1991 provisions were designed to avoid
provider-specific taxes, and included "hold harmless" mechanisms
guaranteeing that providers would receive all their money back after it
was used by the state to recoup additional federal funds; however,
broad-based provider taxes remained permissible, and states soon
developed other ways to maximize federal Medicaid spending.

**[Proposed Regulations]{.underline}**: During the past year, the
Centers for Medicare and Medicaid Services (CMS) has attempted to move
forward on several proposed regulations addressing specific issues and
service areas within the Medicaid program. Specifically, the various
proposed rules would:

-   Limit reimbursement for publicly-owned health providers to costs
    incurred, narrow the definition of unit of government, and require
    providers to retain all Medicaid payments, in order to restrain
    intergovernmental transfers designed primarily to maximize states'
    federal Medicaid payments;

-   Eliminate Medicaid reimbursement for graduate medical education;

-   Restrict the scope of rehabilitation services subject to the federal
    Medicaid match and eliminate coverage of day habilitation services
    for individuals with developmental disabilities;

-   Prohibit federal Medicaid payments for administrative activities
    performed by schools and transportation of children to and from
    school;

-   Restrict the scope of Medicaid outpatient hospital services and
    clarify the upper payment classification for outpatient services;
    and

-   Restrict the scope of targeted case management services, and specify
    that Medicaid will not reimburse states for services where another
    third party is liable for payment.

The proposed regulations were issued at various times between May and
December 2007, and are collectively projected to result in at least
\$12.1 billion in savings to the federal government over the next five
fiscal years.[^1] By point of comparison, these savings would constitute
approximately 1% of total federal spending on Medicaid, which over the
next five years is estimated to total \$1.2 trillion.[^2]

In addition, in February 2008, CMS issued proposed regulations altering
current regulations on provider taxes; this rule, proposed as a result
of legislative changes enacted in the Tax Relief and Health Care Act of
2006 (P.L. 109-432) and the Deficit Reduction Act of 2005 (P.L.
109-173), would reduce the maximum provider tax under the federal "safe
harbor" from 6% to 5.5% and make other related changes, saving an
estimated \$400-600 million over five years.[^3]

**[Recent Legislative Developments]{.underline}**: In response to
several of the Medicaid payment rules proposed last year, Congress has
taken action to block CMS from issuing final regulations. Section
7002(a)(1) of the 2007 wartime supplemental appropriations bill (P.L.
110-28) prohibited promulgation of regulations related to cost limits
for providers and graduate medical education (GME) for one year---until
May 25, 2008. In addition, Medicare physician payment legislation passed
last December (P.L. 110-173) included prohibitions on promulgation of
regulations addressing rehabilitation and school-based transportation
services until June 30, 2008.

On March 13, 2008, House Energy and Commerce Committee Chairman John
Dingell (D-MI) and Rep. Tim Murphy (R-PA) introduced H.R. 5613,
Protecting the Medicaid Safety Net Act. The legislation would extend
until April 1, 2009, the existing moratoria on CMS' issuance of the
Medicaid regulations discussed above, and would further impose moratoria
on issuance of proposed rules addressing case management, re-defining
hospital outpatient services, and allowable provider taxes. An Energy
and Commerce hearing on the legislation is scheduled for April 3, 2007,
and further legislative action is possible, either as a stand-alone
measure or as part of Medicare physician reimbursement legislation.

In addition, House Energy and Commerce Health Subcommittee Chairman
Frank Pallone (D-NJ) has introduced H.R. 5268, which would provide a
temporary increase in federal Medicaid matching funds to states under
the FMAP formula for five fiscal quarters, through October 2009. Similar
proposals were circulated early this year as part of the debate
surrounding the "stimulus" bill; while the National Governors
Association and state Medicaid directors expressed strong support for
these provisions, they were not included in the final legislation.
However, it is possible but not certain that such measures regarding
FMAP could be attached to either the wartime supplemental appropriations
legislation or a possible second "stimulus" package being discussed by
the Democratic leadership.

**[GAO Analysis]{.underline}**: Since 1994, the Government
Accountability Office (GAO) has compiled more than a dozen reports
highlighting problems with Medicaid financing, and specifically the ways
in which state governments attempt to "game" Medicaid reimbursement
policies in order to maximize the amount of federal revenue funding
state health care programs. The persistent shortcomings in federal
oversight of these state funding schemes prompted GAO to add the
Medicaid program to its list of federal entities at high risk of
mismanagement, waste, and abuse in 2003.

Several of the GAO reports discuss state reimbursement efforts for
several of the services CMS proposes to change in its new regulations.
For instance, testimony in June 2005 analyzed the ways in which 34
states---up from 10 in 2002---employed contingency-fee consultants to
maximize federal Medicaid payments. The report found that from
2000-2004, Georgia obtained \$1.5 billion in additional reimbursements,
and Massachusetts \$570 million.[^4] The report concluded that the
states' claims for targeted case management "appear to be inconsistent
with current CMS policy" and claims for rehabilitation services "were
inconsistent with federal law."[^5]

In other areas, GAO found potentially inappropriate behavior---higher
reimbursements for school-based health and administrative services that
were not fully passed on to the relevant school districts, and
questionable administrative costs, such as a 100% claim on a
Massachusetts state official's salary as a Medicaid administrative cost,
even though the official worked on unrelated projects for other states
designed to increase their own Medicaid reimbursements.[^6]

The GAO reports also demonstrate states' use of intergovernmental
transfers to maximize federal Medicaid reimbursements. In these schemes,
local-government health facilities transfer funds to the state Medicaid
agency. The Medicaid agency in turn transfers funds back to the
local-government facility---but not before filing a claim with CMS to
obtain federal reimbursement. Although permissible under current law in
many cases, GAO found that these schemes "are inconsistent with
Medicaid's federal-state partnership and fiscal integrity."[^7]

Many of the GAO reports over the past decade---whose titles are listed
at the bottom of this brief---have included calls for additional federal
oversight around various state Medicaid reimbursement initiatives,
particularly the need for clear and consistently applied guidance from
CMS about the permissiveness of various financing arrangements.[^8]
Several of CMS' proposed regulations attempt to remedy this problem, and
restore clarity and fiscal integrity to the Medicaid program.

**[Reports of Medicaid Waste and Fraud]{.underline}**: Although much of
the debate surrounding the proposed CMS regulations has centered on the
proper scope and limits of covered services within the Medicaid program,
it is also worth noting the considerable amount of waste and criminal
fraud present within some state Medicaid programs. An extensive
investigation published by *The New York Times* in July 2005 revealed
several examples of highly questionable activity within the New York
Medicaid program:

-   A Brooklyn dentist who billed Medicaid for performing 991 procedures
    in a single day;

-   One physician who wrote 12% of all the prescriptions purchased by
    New York Medicaid for an AIDS-related drug to treat wasting
    syndrome---allegedly so the steroid could be re-sold on the black
    market to bodybuilders;

-   Over \$300 million---far more than any other state Medicaid
    program---in spending on transportation services, some of which
    involved rides for seniors mobile enough to rely on public
    transportation and other services which investigators believe may
    not have been performed at all; and

-   A school administrator in Buffalo who in a single day recommended
    that 4,434 students receive speech therapy funded by Medicaid---part
    of \$1.2 billion in improper spending by the state on speech
    services, according to a federal audit.

A former state investigator of Medicaid abuse estimated that fraudulent
claims totaled approximately 40% of all Medicaid spending in New
York---nearly \$18 billion per year, which may help explain why New
York's Medicaid expenditures greatly exceed California's, despite a
smaller overall population and fewer Medicaid beneficiaries.[^9]

Likewise, reports from the Department of Health and Human Services'
Inspector General reflect Medicaid reimbursement submissions by states
that either lack appropriate documentation for the claims or represent
inappropriate use of Medicaid resources. For example, one May 2003 claim
for Medicaid targeted case management reimbursement included the
following notation from the case manager explaining her contact with the
beneficiary:

> Phone call with mother. Discussed the outstanding warrant for \[name
> redacted\]. She does not know where he is. She will call police when
> he shows up.

While it may represent good public policy for this type of
contact---which attempted to locate a juvenile for whom an outstanding
arrest warrant existed---some conservatives would argue that such
actions lie outside the scope of the Medicaid program's intent and
represent a far-from-ideal expenditure of federal matching dollars.

**[Conservative Concerns]{.underline}**: Given the many GAO reports
highlighting problems with state Medicaid financing schemes, and the
disturbing reports of fraud and graft within many Medicaid programs,
some conservatives may be troubled by potential legislative action to
override CMS' modest attempts at limiting questionable behavior by state
Medicaid agencies. Likewise, a potential increase in the Medicaid FMAP
formula might be viewed by some conservatives as a "bailout" for states
which over-extended entitlement promises over the last few years---and
which have failed to implement strong anti-fraud programs to ensure that
Medicaid funds are spent wisely. Some conservatives may argue that
states wishing to reverse CMS' proposed rules, or to seek an "emergency"
FMAP increase from the federal government, should first ensure that
their own fiscal houses are in order with respect to Medicaid waste,
fraud, and abuse.

Although many state governors and Medicaid directors have pointed to the
recent economic slowdown as putting a particular squeeze on their
budgets, a recent study by researchers at the Urban Institute found that
revenue loss generates a measurably larger impact on state budgets than
enrollment increases in Medicaid and related public health
programs.[^10] Because potential state deficits during economic
downturns therefore stem largely from failed revenue models rather than
greater public reliance on Medicaid and related programs, some
conservatives may question whether the tactic of relying upon the
federal government for backstop assistance will have the twin negative
effects of increasing federal spending and debt while encouraging "moral
hazard" among states with flawed budgetary models.

However, the discussion of Medicaid funding levels does provide
conservatives with an opportunity to raise the important issue of
entitlement reform. One possible solution would see Medicaid converted
into a block grant program, allowing for predictable payments to states,
ending state distortionary schemes designed to win additional federal
dollars, and enabling Congress to engage in a more rational attempt to
control health care costs while setting clear national fiscal
priorities. At a minimum, some conservatives may support efforts to
convert those portions of Medicaid not directly related to essential
medical services into a discretionary spending program, which would
re-focus Medicaid on its original mission of providing health care for
low-income individuals, while allowing services tangential to that
mission to compete with other federal programs for scarce funding
dollars.

For further information on this issue see:

-   [*RSC Policy Brief: Medicaid Funding
    Issues*](http://www.house.gov/hensarling/rsc/doc/pb_012208_medicaid_fmap.doc)

-   [*New York Times Article: New York Medicaid Fraud May Reach into
    Billions*](http://www.nytimes.com/2005/07/18/nyregion/18medicaid.html?_r=1&pagewanted=print&oref=slogin)

-   [*November 2007 GAO Testimony: Medicaid Financing: Long-Standing
    Concerns about Inappropriate State Arrangements Support Need for
    Improved Federal
    Oversight*](http://www.gao.gov/new.items/d08255t.pdf)

-   [*March 2007 GAO Report: Medicaid Financing: Federal Oversight
    Initiative Is Consistent with Medicaid Payment Principles but Needs
    Greater Transparency*](http://www.gao.gov/new.items/d07214.pdf)

-   [*June 2006 GAO Report: Medicaid Financial Management: Steps Taken
    to Improve Federal Oversight but Other Actions Needed to Sustain
    Efforts*](http://www.gao.gov/new.items/d06705.pdf)

-   [*June 2005 GAO Testimony: Medicaid: States\' Efforts to Maximize
    Federal Reimbursements Highlight Need for Improved Federal
    Oversight*](http://www.gao.gov/new.items/d05836t.pdf)

-   [*June 2005 GAO Testimony: Medicaid Financing: States\' Use of
    Contingency-Fee Consultants to Maximize Federal Reimbursements
    Highlights Need for Improved Federal
    Oversight*](http://www.gao.gov/new.items/d05748.pdf)

-   [*March 2004 GAO Testimony: Medicaid: Intergovernmental Transfers
    Have Facilitated State Financing
    Schemes*](http://www.gao.gov/new.items/d04574t.pdf)

-   [*February 2004 GAO Report: Medicaid: Improved Federal Oversight of
    State Financing Schemes
    Needed*](http://www.gao.gov/new.items/d04228.pdf)

-   [*October 2001 GAO Report: Medicaid: HCFA Reversed its Position and
    Approved Additional State Financing
    Schemes*](http://www.gao.gov/new.items/d02147.pdf)

-   [*September 2000 GAO Testimony: Medicaid: State Financing Schemes
    Again Drive Up Federal
    Payments*](http://www.gao.gov/archive/2000/he00193t.pdf)

-   [*April 2000 GAO Report: Medicaid in Schools: Improper Payments
    Demand Improvement in HCFA
    Oversight*](http://www.gao.gov/archive/2000/h600069.pdf)

-   [*June 1999 GAO Testimony: Medicaid: Questionable Practices Boost
    Federal Payments for School-Based
    Services*](http://www.gao.gov/archive/1999/he99148t.pdf)

-   [*August 1994 GAO Report: Medicaid: States Use Illusory Approaches
    to Shift Program Costs to Federal
    Government*](http://archive.gao.gov/t2pbat2/152543/pdf)

**[RSC Staff Contact]{.underline}**: Chris Jacobs,
<christopher.jacobs@mail.house.gov>, (202) 226-8585

\###

[^1]: Kaiser Commission on Medicaid and the Uninsured, "Medicaid:
    Overview and Impact of New Regulations," (Washington, DC, Report
    7739, January 2008), available online at
    <http://kff.org/medicaid/upload/7739.pdf> (accessed March 31, 2008),
    p. 2.

[^2]: Office of Management and Budget, *Analytical Perspectives: Budget
    of the United States Government, Fiscal Year 2009*, available online
    at <http://www.whitehouse.gov/omb/budget/fy2009/pdf/spec.pdf>
    (accessed April 1, 2008), p. 383.

[^3]: Jean Hearne, "Medicaid Provider Taxes," CRS Report RS22843, March
    21, 2008, pp. 4-6.

[^4]: Government Accountability Office, "Medicaid Financing: States' Use
    of Contingency Fee Consultants to Maximize Federal Reimbursements
    Highlights Need for Increased Federal Oversight," (Washington,
    Report GAO-05-748, June 2005) available online at
    <http://www.gao.gov/new.items/d05748.pdf> (accessed March 31, 2008),
    p. 4.

[^5]: Ibid., p. 19.

[^6]: Ibid., pp. 27-29.

[^7]: Ibid., p. 24.

[^8]: See ibid., p. 30.

[^9]: Clifford Levy and Michael Luo, "Medicaid Fraud May Reach into
    Billions," *The New York Times* 18 July 2005, available online at
    <http://www.nytimes.com/2005/07/18/nyregion/18medicaid.html?_r=1&pagewanted=print&oref=slogin>
    (accessed March 29, 2008).

[^10]: John Holahan, Stan Dorn, *et al*., "Medicaid, SCHIP, and Economic
    Downturn: Policy Challenges and Policy Responses," (Washington, DC,
    Alliance for Health Reform briefing on Health Care and the Economic
    Slowdown, February 15, 2008), available online at
    <http://www.allhealth.org/briefingmaterials/MedicaidSCHIPeconomicdownturn_2-14-2008-1079.ppt>
    (accessed March 29, 2008).