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# Legislative Bulletin.................................................April 22, 2008

**Contents:**

**H.R. 5613**---Protecting the Medicaid Safety Net Act

H.R. 5613---Protecting the Medicaid Safety Net Act

(*Dingell, D-MI*)

**Please note the Conservative Concerns beginning on page 6, and those
highlighted throughout the bulletin.**

**[Order of Business]{.underline}**: The bill is scheduled to be
considered on Tuesday, April 22^nd^, under a motion to suspend the rules
and pass the bill.

**[Summary]{.underline}**: H.R. 5613 would extend certain existing
moratoria on the Centers for Medicare and Medicaid Services (CMS),
prohibiting the agency from promulgating rules related to the integrity
of the Medicaid program until April 1, 2009. In particular, the bill
would extend moratoria on proposed regulations placing restrictions on
intergovernmental transfers and restricting payments for graduate
medical education; the prohibitions were first enacted as part of last
year's supplemental wartime appropriation (P.L. 110-28) and are
scheduled to expire on May 25, 2008. The bill would also extend
prohibitions on CMS regulations relating to rehabilitation services, as
well as school-based administrative and transportation services; these
prohibitions were first enacted in Medicare physician payment
legislation (P.L. 110-173) last December, and are scheduled to expire on
June 30, 2008.

In addition, H.R. 5613 would impose additional new moratoria on CMS
relating to other proposed Medicaid regulations, also until April 2009.
Specifically, the bill would prohibit the Secretary of Health and Human
Services from imposing additional restrictions with respect to targeted
case management payments, the definition of outpatient hospital
services, and Medicaid provider taxes (with certain exceptions).

The bill also appropriates an additional \$25 million per year to CMS
for the purposes of anti-fraud enforcement activity within the Medicaid
program.

H.R. 5613 includes two reports to Congress on the proposed regulations.
By July 1, 2008, the Department of Health and Human Services (HHS) will
report on its justification and authority for proposing the regulations.
The bill also includes \$5 million in appropriations for HHS to hire an
independent contractor to produce a report by March 1, 2009, on the
proposed regulations and their impact on states.

H.R. 5613 also extends a web-based asset verification system to all 50
states, effective by the end of fiscal year 2013. This provision would
expand the Social Security Administration's Supplemental Security Income
(SSI) pilot program, giving states a new tool for verifying the assets
of Medicaid recipients. Currently, such a system only exists as a
demonstration project in three states: California, New Jersey, and New
York.

**[Additional Background on Changes Made in Committee]{.underline}**:
During consideration in the Energy and Commerce Committee, Chairman
Dingell and Ranking Member Joe Barton (R-TX) reached agreement on
several modifications to the legislation. The revised language
incorporated at Subcommittee narrowed the scope of the proposed
moratoria to permit CMS to engage in outreach activities with states.
Over the past several years, CMS has used various state-level audits to
reach agreements with state Medicaid agencies to curtail abusive and/or
questionable financing tactics. The revised language in H.R. 5613 would
permit CMS to continue these individual consent agreements with states,
while maintaining the moratoria on CMS' ability to enact regulations
prohibiting these activities permanently.

In addition, the substitute language adopted in Committee included the
additional \$25 million per year in anti-fraud enforcement, as well as
an independent study assessing the need for the regulations and their
potential impact on states. The Committee substitute also incorporated
the web-based asset verification system to pay for the moratorium; the
Administration had previously suggested that this program be extended as
a savings mechanism to finance portions of the farm bill.

**[Additional Background on 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. Many of
these regulations respond to Government Accountability Office (GAO)
studies and reports by the HHS Inspector General highlighting areas
where the fiscal integrity of the Medicaid program needed improvement. A
brief summary of each rule that would be halted by H.R. 5613 follows:

*Intergovernmental Transfers*: This rule 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. A final rule
was issued on May 29, 2007; the moratorium currently in place expires on
May 25, 2008. The Congressional Budget Office (CBO) scores this
regulation as saving \$9.0 billion in federal outlays over five years,
and \$22.0 billion over a decade.

*Graduate Medical Education*: This rule would eliminate Medicaid
reimbursement for graduate medical education, on the grounds that
reimbursements for medical training are outside the statutory scope of
the Medicaid program. A Notice of Proposed Rulemaking (NPRM) was issued
on May 23, 2007; the current moratorium expires May 25, 2008. Five year
estimated savings are \$0.8 billion, and ten year estimated savings are
\$1.9 billion.

*School-Based Administrative and Transportation Services*: This rule
would prohibit federal Medicaid payments for administrative activities
performed by schools and transportation of children to and from school.
In some instances, school districts bill Medicaid for transporting
students to and from school, even though this is an educational expense,
not a reimbursable medical expense. In addition, HHS audits found that
schools were claiming capital and debt service as "administrative
services" subject to Medicaid reimbursement. The proposed rule would not
alter the current policy of reimbursing schools for *bona fide* medical
expenses incurred on school property, such as speech therapy. A final
rule was issued December 28, 2007; the current moratorium expires June
30, 2008. Five year estimated savings are \$4.2 billion, and ten year
savings are estimated at \$10.2 billion.

*Rehabilitation Services*: This rule would restrict the scope of
rehabilitation services subject to the federal Medicaid match and
eliminate coverage of day habilitation services for individuals with
developmental disabilities. In many instances, CMS has found that states
have billed therapeutic foster care as a "bundled" payment, resulting in
federal payments for activities related to foster care as opposed to
direct medical expenses. In other cases, state plans for reimbursable
expenses include recreational or social activities not directly related
to rehabilitative goals. An NPRM was issued on August 13, 2007; the
current moratorium expires on June 30, 2008. CBO scores this change as
saving \$1.4 billion over five years, and \$3.5 billion over a decade.

*Outpatient Hospital Services*: This rule would restrict the scope of
Medicaid outpatient hospital services and clarify the upper payment
classification for outpatient services to align more closely with the
Medicare definition of outpatient services. An NPRM was issued on
September 28, 2007; no moratorium is currently in place. Five year
savings are estimated at \$0.3 billion, and ten year savings are
estimated at \$0.7 billion.

*Targeted Case Management*: This rule would 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. In many cases, HHS audits have found a lack of documentation
related to targeted case management claims, or state plans for
reimbursement that fall outside the scope of the Medicaid program's
focus on medical services. A final rule was issued December 4, 2007,
subject to an implementation date of March 3, 2008. The change would
save an estimated \$1.5 billion over five years, and \$3.3 billion over
ten.

*Provider Taxes*: This rule would reduce the permissible level of
Medicaid provider taxes, as included in the Tax Relief and Health Care
Act of 2006 (P.L. 109-432), and would also clarify the hold harmless
provision for provider taxes with respect to the positive correlation
between the level of provider taxes imposed by states and direct or
indirect Medicaid payments from states back to providers. A final rule
was issued February 22, 2008, subject to a compliance date of October 1,
2008. Five and ten year savings are estimated at \$0.6 billion.

In total, the proposed regulations are collectively projected to result
in approximately \$16-18 billion in savings to the federal government
over the next five fiscal years, and more than \$42 billion over a
decade.[^1] By point of comparison, these savings would constitute just
over 1% of total federal spending on Medicaid, which over the next five
years is estimated to total more than \$1.2 trillion.[^2]

**[Additional Background on GAO Reports of Medicaid
Abuses]{.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.[^3] 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."[^4]

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.[^5]

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."[^6]

Many of the GAO reports over the past decade---whose titles are listed
at the bottom of this bulletin---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.[^7] Several of CMS' proposed regulations attempt to remedy
this problem, and restore clarity and fiscal integrity to the Medicaid
program.

**[Additional Background on 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.[^8]

However, other audits emphasize that in some cases, providers can be
victims of state efforts to reclaim additional federal Medicaid dollars.
A 2004 report from the Department of Health and Human Services'
Inspector General found that New York state required a nursing home to
return more than half of its Medicaid revenues to the state, resulting
in net revenues to the nursing home that were \$20 million less than its
operating costs. The report noted:

> The state's upper-payment-limit funding approach benefited the state
> and the county more than the nursing home. The state received \$20
> million more than it expended for the nursing home's Medicaid
> residents without effectively contributing any money, and the county
> was reimbursed 100 percent for its upper-payment-limit contribution.
> ***We are concerned that the federal government in effect provided
> almost all of the nursing home's Medicaid funding, contrary to the
> principle that Medicaid is a shared responsibility of the federal and
> state governments.***

The audit went on to note that the high level of Medicaid payments the
nursing home was required to return to the state---and the operating
losses the nursing home incurred on its Medicaid patients as a
result---led to significant levels of understaffing that may have
affected the quality of care provided to patients.[^9]

Other HHS audits 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.

**[Committee Action]{.underline}**: On March 13, 2008, the bill was
introduced and referred to the Energy and Commerce Committee. On April
16, 2008, the full Energy and Commerce Committee reported the bill to
the full House by a vote of 46-0.

**[Possible Conservative Concerns]{.underline}**: Numerous aspects of
this legislation may raise concerns for conservatives, including, but
not necessarily limited to, the following:

-   [Process]{.underline}. H.R. 5613 is being brought to the House floor
    under suspension of the rules, a procedure generally reserved for
    minor authorizations and smaller pieces of legislation, such as the
    naming of post offices. Some conservatives may be concerned that a
    bill costing over a billion dollars is being rushed through House
    floor consideration under expedited procedures.

-   [Budgetary Gimmick]{.underline}. In order to comply with PAYGO
    rules, H.R. 5613 would impose a moratorium on CMS action until April
    2009---and the legislation contains provisions offsetting the cost
    to the federal government for all savings not realized through that
    date. However, staff for Energy and Commerce Committee Chairman
    Dingell have publicly stated that H.R. 5613 is intended to delay the
    implementation of the Medicaid rules just long enough so that a
    future Administration can withdraw them. Because withdrawing the
    regulations would result in approximately \$16-18 billion in lost
    savings to the federal government over five years, and because
    action taken by a future Administration would not be subject to
    PAYGO, some conservatives may believe that H.R. 5613's sponsors
    intend to violate the spirit, if not the letter, of the PAYGO
    requirement under House rules.

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-   [Undermine Previous Republican Efforts to Reform
    Medicaid]{.underline}. In December 2005, 212 Members of
    Congress---all Republicans---voted for legislation (P.L. 109-171)
    that generated less than \$4.8 billion in savings from the Medicaid
    program as a first attempt to restore its fiscal integrity. However,
    if the moratoria remain intact, those modest reductions in
    Medicaid's growth rate would be more than exceeded by the \$16-18
    billion in foregone savings associated with the regulations' repeal.

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-   [Encourage State Efforts to "Game" the Medicaid
    Program]{.underline}. As highlighted above, nearly three dozen
    states have in recent years hired contingency fee consultants
    designed to maximize the portion of Medicaid costs paid for by the
    federal government. Blocking regulations designed to respond to
    funding mechanisms which states and their consultants have
    established---and more than a dozen GAO reports over nearly 15 years
    have criticized---may only further encourage states to take steps
    that increase federal costs and undermine Medicaid's fiscal
    integrity.

-   [Harm Hospitals and Other Providers]{.underline}. As explained
    above, HHS Inspector General reports have revealed that various
    funding mechanisms designed to increase federal Medicaid revenues
    for states have often had the ancillary effect of reducing net
    payments to providers. H.R. 5613, by blocking regulations designed
    to ensure that payments to Medicaid providers do not become ensnared
    in various schemes by states to increase federal Medicaid spending,
    may prevent some providers from seeing their net Medicaid payments
    rise when the proposed regulations take effect.

**[Administration Position]{.underline}**: Although the Statement of
Administration Policy (SAP) was not available at press time, Health and
Human Services Secretary Leavitt has previously
[written](http://www.hhs.gov/asl/medicaidletter.html) to Energy and
Commerce Chairman Dingell and Ranking Member Barton indicating that the
Administration strongly opposes H.R. 5613 and would recommend a
Presidential veto.

**[Cost to Taxpayers]{.underline}**: A final score of the bill was not
available at press time. However, a preliminary CBO estimate indicated
that H.R. 5613's moratorium through April 2009 on the issuance of seven
proposed regulations would cost taxpayers \$1.65 billion over five and
ten years. However, as noted above, this score presumes the full
implementation of the regulations in April 2009 under a new
Administration. Outright repeal of the regulations would cost \$16.5
billion over five years---ten times the cost of H.R. 5613.

Additional mandatory spending---both \$25 million annually for CMS
anti-fraud enforcement activity with respect to Medicaid, and \$5
million for an independent study on the proposed regulations---would
cost \$129 million over five years, and \$254 million over ten.

H.R. 5613 would pay for this spending by extending an asset verification
pilot program currently operating in three states to all 50 states,
saving \$1.0 billion over five years and \$4.5 billion over ten. The
bill would also make adjustments to the Physician Assistance and Quality
Improvement (PAQI) fund to comply with five-year PAYGO scoring rules,
and deposit the additional savings over and above the ten-year cost of
the moratoria. Reports indicate that the \$2.6 billion in additional
ten-year savings will be withdrawn from the PAQI fund later this year to
help finance Medicare physician reimbursement legislation.

**[Does the Bill Expand the Size and Scope of the Federal
Government?]{.underline}**: Yes, the bill would prohibit CMS from taking
administrative actions (which are already built into CBO's budgetary
baseline) to prevent states from expanding the scope of the Medicaid
program.

**[Does the Bill Contain Any New State-Government, Local-Government, or
Private-Sector Mandates?]{.underline}**: No.

**[Does the Bill Comply with House Rules Regarding Earmarks/Limited Tax
Benefits/Limited Tariff Benefits?]{.underline}**: A Committee report
citing compliance with House earmark disclosure rules was unavailable at
press time.

**[Constitutional Authority]{.underline}**: A Committee report citing
constitutional authority was unavailable at press time.

**[Additional Background]{.underline}**: For further information on this
issue see:

-   [*RSC Policy Brief: Medicaid and the
    States*](http://www.house.gov/hensarling/rsc/doc/pb_040208_medicaidregs.doc)

-   [*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]: Because CMS proposals with respect to rehabilitation services
    (estimated savings of \$1.4 billion over five years), graduate
    medical education (\$0.8 billion estimated savings), and the
    definition of outpatient hospital services (\$0.3 billion estimated
    savings) are at the proposed rulemaking stage, CBO assigns a
    baseline weighting factor of 50% to the proposed regulations,
    reflecting the uncertainties of the rulemaking process. Thus, while
    CBO estimates a total of \$17.8 billion in savings over five years
    if all rules were implemented as currently issued, a permanent
    prohibition on these seven rules would require \$16.5 billion in
    savings under House PAYGO rules.

[^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]: 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.

[^4]: Ibid., p. 19.

[^5]: Ibid., pp. 27-29.

[^6]: Ibid., p. 24.

[^7]: See ibid., p. 30.

[^8]: 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).

[^9]: "Adequacy of Medicaid Payments to Albany County Nursing Home,"
    (Washington, DC, Department of Health and Human Services Office of
    the Inspector General Report #A-02-02-01020), available online at
    <http://oig.hhs.gov/oas/reports/region2/20201020.pdf> (accessed
    April 20, 2008), pp. 6-7.