Testimony Before the United States House of Representatives  
    
Committee on Oversight and Government Reform:      
Subcommittee on Government Organization, Efficiency and      
Financial Management; and Subcommittee on Health Care, District 
of Columbia, Census and the National Archives 
 
 
 
 
 
Examining the Administration's Failure  
 
to Prevent and End Medicaid Overpayments 
 
 
 
Testimony of: 
  John Hagg 
Director of Medicaid Audits 
 
 
 
 
   
Department of Health and Human Services 
September 20, 2012 
2 p.m. 
Rayburn Building, Room 2154 
 
  Testimony of: 
John Hagg 
Director of Medicaid Audits 
for the Centers for Medicare & Medicaid Audits 
Office of Inspector General, U.S. Department of Health and Human Services 
 
Introduction 
Good afternoon, Chairman Gowdy, Ranking Member Davis, and other distinguished Members of 
the Committee.  Thank you for the opportunity to testify about the Office of Inspector Generals 
(OIG) recent report involving Medicaid payment rates for State-operated developmental centers 
in New York.  My testimony will provide an overview of the report findings, recommendations, 
and related work. 
 
Overview 
Medicaid payments to developmental centers in New York State far exceed New Yorks actual 
costs of providing services to Medicaid beneficiaries.1 
 
New York claimed $2.27 billion ($1.13 billion Federal share) in Medicaid reimbursements to 
pay for services related to 15 developmental centers in State fiscal year2 (SFY) 2009.  New 
Yorks methodology was not based on actual costs.  If New York had used actual costs in its 
rate-setting methodology, Medicaid reimbursements to the developmental centers could have 
been as much as $1.41 billion less in SFY 2009.3  In turn, the Federal Government could have 
saved as much as $701 million in that year alone.    
 
Based on the foregoing and previous audits of payments to public providers in other States, OIG 
recommends that payments to public providers be limited to the actual cost of providing services.  
This would help ensure that in New York and other States, Medicaid payment methodologies for 
public providers are reasonable and economical.  Until the Centers for Medicare & Medicaid 
Services (CMS) implements a policy to limit payments to actual cost, it should work with New 
York to ensure an appropriate Medicaid daily rate for State-operated developmental centers. 
 
 
 
 
                                                           
1 Medicaid Rates for New York State Operated Developmental Centers May Be Excessive, available at 
http://oig.hhs.gov/oas/reports/region2/21101029.asp. 
2 New Yorks fiscal year starts April 1st and ends March 31st. 
3 To arrive at this figure, we substituted actual costs for the State-calculated total reimbursable costs.   
2 
  Background 
 
Medicaid Program 
 
Pursuant to Title XIX of the Social Security Act (the Act), the Medicaid program provides 
medical assistance to low-income individuals and individuals with disabilities.  The Federal and  
State Governments jointly fund and administer Medicaid.  At the Federal level, CMS administers 
Medicaid.  Each State administers its Medicaid program in accordance with a CMS-approved 
State plan.  Although the State has considerable flexibility in designing and operating its 
Medicaid program, it must comply with applicable Federal requirements, including a provision 
of the Act that requires that payment for care and services be consistent with efficiency, 
economy, and quality of care.4  The Federal Government pays its share of a States medical 
assistance expenditures under Medicaid based on the Federal medical assistance percentage 
(FMAP), which varies depending on the States relative per capita income.  By law, the FMAP 
rates cannot be lower than 50 percent.  During our audit period, New York had an FMAP 
ranging from 50 to 58 percent.5   
 
New Yorks Medicaid Program 
 
In New York, the Office for People With Developmental Disabilities (OPWDD) provides 
services to both Medicaid and non-Medicaid eligible individuals with intellectual and 
developmental disabilities under a cooperative agreement with the Department of Health (DOH), 
which administers New Yorks Medicaid program.  In SFY 2009, New York had approximately 
$45 billion in Medicaid expenditures, from which the State received $25 billion in Federal 
reimbursements.   
 
Intermediate Care Facilities in New York  
 
OPWDD oversees all Intermediate Care Facilities (ICF) for individuals with intellectual and 
developmental disabilities.  These facilities are residential treatment options designed for 
individuals whose disabilities severely limit their ability to live independently.  ICFs provide 
24-hour onsite assistance and training, intensive clinical and direct-care services, supervised 
activities, and a variety of therapies.  Developmental and intellectual disabilities include a variety 
of conditions that cause mental or physical limitation (e.g., autism and cerebral palsy).   
 
                                                           
4 Section 1902(a)(30)(A) of the Social Security Act requires that payment for services be consistent with efficiency, 
economy, and quality of care. 
5 Our audit period was April 1, 2008, through March 31, 2009.  The American Recovery and Reinvestment Act 
effectively raised the FMAP for States beginning the first quarter of Federal fiscal year 2009.  For October 1, 2008, 
through March 31, 2009, New York had an FMAP of 58.78 percent because of the enhanced percentage.  
3 
  ICFs include State-operated and privately operated facilities with 30 or fewer beds and State-
operated facilities with more than 30 beds.  During our audit period, New York operated 13 
facilities with more than 30 beds; it also operated 2 Small Residential Units (SRU)6 that provided 
services to individuals with developmental and intellectual disabilities on the campus of 1 of 
those 13 larger facilities.  Each of these 15 facilities7 received the same daily reimbursement rate 
of $4,116 per beneficiary in SFY 2009.  DOH claimed Medicaid reimbursement on behalf of 
1,688 beneficiaries at the developmental centers of $2.27 billion ($1.13 billion Federal share).  
New Yorks actual costs for the developmental centers totaled $578 million. 
 
Key State Plan Amendments Affecting Developmental Center Payment Rates  
 
Developmental center payment rates are set using a complex methodology detailed in 
Attachment 4.19-D, Part II, of New Yorks Medicaid State plan.  The first major revisions to the 
rate-setting reimbursement methodology for the developmental centers were approved in January 
1986, retroactive to April 1984 under state plan amendment (SPA) 84-10.  This state plan 
amendment allowed New York to use a trend factor and volume variance adjustment.8  At this 
point, the rates were on a 2-year cycle.  In year 1 of the cycle, rates were based on actual cost 
reports with yearend volume variance adjustments, while year 2 rates were based on the same 
cost reports, but trended forward with a volume variance adjustment.  The following year, the 
rates would be readjusted using new cost reports to start the process over.  
 
In 1991, SPA 90-12 was approved,9 effectively eliminating the link between actual costs and 
total reimbursable costs by allowing New York to use base rates set in 1986 to be trended 
forward.  Figure 1 below clearly shows a rapid increase in the rate once this amendment took 
effect.   
Audit Findings 
The Growth of Developmental Centers Rate Significantly Outpaced Those of Other ICFs 
The daily rate for a Medicaid beneficiary to reside in a developmental center grew from $195 per 
day in SFY 1985 to $4,116 per day in SFY 2009.10  The daily rates for all other ICFs in New 
                                                           
6 The SRUs have a 12-bed capacity.   
7 We refer to the 13 State-operated ICFs with more than 30 beds and the 2 state-operated SRUs as developmental 
centers.    
8 The volume variance adjustment ensures that annual decreases in headcount at a developmental center do not cause 
that center to lose operating funds needed to support its fixed costs. It allows New York to retain 64 percent of the 
costs associated with beneficiaries no longer in a developmental center. 
9 The SPA went into effect retroactive to 1990.  However, the State considered 1990 a transition year, and the major 
changes to the reimbursement methodology went into effect in 1991.  
10 The daily rates per beneficiary in SFY 2010 and 2011 were $4,556 and $5,118, respectively. 
4 
  York during SFY 2009 (both State-operated and privately operated), which are based on actual 
costs, were $257 to $902,11 with an average rate of $444.   
Figure 1 compares the growth of the statewide Medicaid daily rate for developmental centers to 
the rates of three nondevelopmental center ICFs.12 
Medicaid Daily Rate for Selected Intermediate Care Facilities in New York (1985-2009) 
Rock Hill ICF (non-State-operated)  Brooklyn ICF (non-State-operated) 
Staten Island ICF (State-operated)  State Developmental Centers (aggregate) 
$4,500 
$4,000 
$3,500 
$3,000 
$2,500 
$2,000 
$1,500 
$1,000 
$500 
$0 
5  6  7  8  9  0  1  2  3  4  5  6  7  8  9  0  1  2  3  4  5  6  7  8  9 
8 8 8 8 8 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0 0
9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0 0
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2
 
Figure 1 
 
New York Claimed Significantly More for Developmental Center Services Than Its Actual Costs 
In SFY 2009, New York claimed nearly $2.27 billion ($1.13 billion Federal share) in Medicaid 
reimbursement for the developmental centers that had an actual cost of $578 million.  Most of 
the difference between the actual costs and total Medicaid reimbursements is due to New Yorks 
starting point in its rate-setting methodology.  New York refers to the starting point as total 
reimbursable operating costs.  This figure includes the prior years total reimbursable operating 
costs, a volume variance adjustment, and a trend factor increase.  Once adjustments are made to 
                                                           
11 In SFY 2009, there were 519 non-State-operated ICFs with rates that ranged from $257 to $776 and 37 State-
operated ICFs with rates that ranged from $476 to $902.   
12 The three nondevelopmental center ICFs were:  (1) a non-State-operated ICF in Brooklyn, New York; (2) a  
non-State-operated ICF in Rock Hill, New York; and (3) a State-operated ICF in Staten Island, New York.   
5 
  the starting point, New York also makes several other adjustments13 before it calculates a final 
rate.   
We substituted the prior years actual costs for the reimbursable operating costs (starting point) 
to recalculate the Medicaid daily rate in SFY 2009 (see Table 1 for New Yorks calculation and 
OIGs recalculation).  We did not individually assess each adjustment to the reimbursable 
operating costs in the rate calculation.  Therefore, we chose to keep them in our comparison to 
provide a conservative estimate of possible savings.  
New Yorks Calculation of Medicaid Daily Rate and OIGs Recalculation 
Rate Component  New York Calculation  OIG Recalculation 
Total Reimbursable  $1,905,498,278   
Operating Costs - 3/31/08  
Actual Costs for    $580,689,833 
Developmental Centers - 
3/31/08 
Net Adjustments14  $399,097,317  $277,034,766 
Total Reimbursable Costs  $2,304,595,595  $857,724,599 
Number of Beneficiary Days  559,974  559,974 
SFY 2009 Medicaid Daily  $4,116  $1,532 
Rate 
Table 1 
If New York had used prior year actual costs as the starting point to calculate the Medicaid daily 
rate, its claim for reimbursement would have totaled $858 million ($429 million Federal share), a 
difference of $1.41 billion ($701 million Federal share).  In addition, the SFY 2009 Medicaid 
daily rate would have been $1,532, or 63 percent less than the calculated reimbursement rate of 
$4,116.   
Privately Operated ICFs Provided Similar Services at a Much Lower Rate 
The Medicaid daily rate for developmental centers was substantially higher than the rate for 
privately operated ICFs, even those that were in similar locations and that offered comparable 
services.15  During our audit period, the Medicaid daily rate for each resident of the Brooklyn 
                                                           
13 New York has several additions and subtractions to the costs used to calculate the rate.  The main additions in 
SFY 2009 were a provider tax assessment of $120 million and a health care enhancement fee of $182 million. 
14 The difference between New York and OIG calculation adjustments is due to the application of percentages used 
in various stages of the calculation (e.g., provider tax assessment based on 5.5 percent of reimbursements). 
15 As part of our audit work, we randomly selected 10 residents of the Brooklyn Developmental Center (BDC) and 
10 residents of a privately operated ICF to review the residents Medicaid billing history during our audit period.  
On the basis of our assessment, we determined that the array of services provided to the residents at the privately 
operated facility was comparable to that provided to the residents of the BDC; however, the private facility had a 
rate about one-eighth of the developmental facility.   
6 
  Developmental Center (BDC), the largest developmental center in New York, was $4,116.  In 
comparison, the approved Medicaid daily rate for residents of a privately operated ICF that 
operated three facilities within 10 miles of the BDC ranged from $421 to $535 per day, 
approximately one-eighth of BDCs rate.  See Table 2 below.   
Comparison of Reimbursement Rates, Therapies, and Annual Billing Per Resident 
  State-Operated  Privately Operated Intermediate Care 
Developmental Center  Facility 
Reimbursement Rate(s)16  $4,116 per day  $421 to $535 per day 
Therapies Included in  Occupational therapy  Occupational therapy 
Reimbursement Rate(s)  Physical therapy  Physical therapy 
Psychologist services  Psychologist services 
Speech and language pathology  Speech and language pathology 
Social work  Social work 
Dietetics and nutrition  Dietetics and nutrition 
Rehabilitation counseling  Rehabilitation counseling 
Nursing services  Nursing services 
Day treatment  Day treatment 
Annual Billing per Resident  Low:   $1,489,623  Low:     $99,120  
High:  $1,502,172  High:  $149,670
Table 2 
CMS and New York Should Develop a Reasonable Daily Rate for Developmental Centers 
Our report provides a conservative estimate that the Federal Government could have saved 
approximately $701 million in SFY 2009 if New York had used actual costs as a starting point in 
its rate calculation.  Over time, the difference between the rate and actual cost has grown and 
resulted in a rate that would not seem to meet Federal rules of economy and efficiency.  CMS 
and New York should work together to develop a rate that is more reflective of these rules.   
Medicaid Payments to Public Providers Should Be Limited to the Actual Cost of Providing 
Services 
The concern about payments to public providers extends beyond payments to New York 
developmental centers.  From 2001 to 2005, OIG audited Medicaid payments to public providers 
in various States and identified payments far exceeding the cost of care.17  In some cases, a large 
portion of the Medicaid payments was not retained by the facilities to provide Medicaid services 
to Medicaid beneficiaries.  Rather, that portion of the Medicaid funds was returned to the State 
and put to other uses.18   
                                                           
16 Rates in the table include ICF or developmental center services and day treatment services. 
17 See Compendium of Unimplemented Recommendations at Part III, pp.1-5, available at 
http://oig.hhs.gov/publications/docs/compendium/2011/CMP-03_Medicaid.pdf.    
18 In 2007, CMS published a proposed rule to, among other things, limit reimbursement for health care providers 
that are operated by units of government to an amount that does not exceed the providers cost.  The rule was 
finalized in May 2008, but was ultimately vacated by Federal District Court.  See Compendium at Part III, p.3. 
7 
  Based on the foregoing, OIG recommends that reimbursement be limited to an amount that does 
not exceed the providers costs.  
Conclusion 
The Medicaid payment rates for the State-operated developmental centers in New York are 
extremely high.  In SFY 2009, New York claimed more than $2.27 billion in Medicaid 
reimbursement for services provided to 1,688 Medicaid beneficiaries in 15 developmental 
centers.  This equaled approximately $4,116 per day for each beneficiary.  The actual cost of the 
developmental centers was $578 million.   
Based on our recent work in New York involving the State-operated developmental centers and 
our prior audit work involving Medicaid payments to public providers in other States, OIG 
recommends that Medicaid payments to public providers be limited to the cost of providing 
services.  This would help to ensure that in New York and other States, Medicaid payment 
methodologies for public providers are reasonable and economical.    
Thank you for your interest in this important issue and the opportunity to be a part of this 
discussion.   
8