Department  of  Health and Human  Services 
OFFICE  OF 
INSPECTOR  GENERAL 
WELFARE  ADMINISTRATIVE  COSTS  OFFICE  OF INSPE~OR  GENERAL 
The  mission of the  Office of Inspector  General  (OIG),  as mandated  by Public  Law 95-452, as 
amended,  is to protect  the  integrity  of the  Department  of Health  and Human  Semites  (HHS) 
programs  as well as the  health  and welfare  of beneficiaries  served  by those  programs.  This 
statutory  mission  is carried  out  through  a nationwide  network  of audits,  investigations,  and 
inspections  conducted  by three  OIG  operating  components:  the  Office of Audit  Services, the 
Office of Investigations,  and the  Office of Evaluation  and Inspections.  The  OIG  also informs 
the  Secretary  of HHS  of program  and management  problems  and recommends  courses  to 
correct  them. 
OFFICE  OF AUDIT  SERVICES 
The  OIGS Office of Audit  Services  (OAS)  provides  all auditing  sefices  for HHS,  either  by 
conducting  audits with its own audit  resources  or by overseeing-audit  work  done  by others. 
Audits  examine  the  performance  of HHS  programs  and/or  its grantees  and contractors  in 
carrying out  their  respective  responsibilities  and are intended  to provide  independent 
assessments  of HHS  programs  and operations  in order  to reduce  waste,  abuse,  and 
mismanagement  and to promote  economy  and efficiency throughout  the  Department. 
OFFICE  OF INVESTIGATIONS 
The  OIGS  Office of Investigations  (01)  conducts  criminal,  civil, and administrative 
investigations  of allegations  of wrongdoing  in HHS  programs  or to HHS  beneficiaries  and of 
unjust  enrichment  by providers.  The  investigative  efforts  of 01  lead to criminal  convictions, 
administrative  sanctions,  or civil money  penalties.  The  01  also oversees  State  Medicaid  fraud 
control  units which investigate  and prosecute  fraud  and patient  abuse  in the  Medicaid  program. 
OFFICE  OF EVALUATION  AND  INSPECTIONS 
The OIGS  Office of Evaluation  and Inspections  (OEI)  conducts  short-term  management  and 
program  evaluations  (called inspections)  that  focus on issues of concern  to the  Department, 
the  Congress,  and the  public.  The  findings  and recommendations  contained  in these  inspection 
reports  generate  rapid,  accurate,  and up-to-date  information  on the  efficiency, vulnerability, 
and effectiveness  of departmental  programs. 
This report  was prepared  in the  Chicago  Regional  Office, Region  V, under  the  direction  of 
William  C. Moran,  Regional  Inspector  General  and Natalie  A. Coen,  Deputy  Regional 
Inspector  General.  Project  staffi  Jennifer  Antico  and W. Mark  Krushat. 
For  additional  copies  of this report,  please  call the Chicago  regional  office at (312) 353-4124.  EXECUTIVE  SUMMARY

PURPOSE 
To  examine  alternative  funding  arrangements  for administrative  costs in the  Aid to 
Families  with Dependent  Children  (AFDC),  Medicaid  and  Food  Stamp  programs. 
BACKGROUND 
Administrative  Costs 
Administrative  costs are  the  expenses  States  incur  to administer  their  programs.  In  1993, 
States  charged  the  Federal  Government  approximately  $5.7 billion  to administer  three 
closely linked  welfare  programs,  the  AFDC,  Medicaid,  and  Food  Stamp  programs.  The 
Federal  Government  pays roughly  half of the  administrative  costs for these  programs, 
and  State  and  local  governments  pay the  remaining  share.  The  payment  system  is a cost 
reimbursement  system,  which means  that  the  States  tell the  Federal  Government  how 
much  they  have  spent  and  the  Federal  Government  reimburses  them  for roughly  half 
their  costs. 
Reimbursement  Problems 
As we have  learned  from  this study, as well as other  studies  on this topic,  particularly  the 
OIG  report,  Reforming  the  System  for the  Determination  of State  and  Local 
Government  Administrative/Indirect  Costs (A-12-92-OO014), there  are  two major 
problems  with  this cost  reimbursement  system:  accountability  and  predictability. 
The  accountability  issues  are  very basic.  We  are  not  sure  what  we are  paying  for and 
whether  the  funds  are  being  spent  in a cost-effective  manner.  The  way that  the  current 
system  operates,  it would  be  too  resource  intensive  to even  try to find out  the  answers. 
We  do know that  some  States  spend  double  and  triple  what  other  States  spend  per 
recipient,  without  any clear  relation  to outcomes.  There  are  a lot of reasons  offered  as 
to why this is the  case,  but  no solid evaluated  data  to confirm  the  degree  to which  these 
reasons  affect  administrative  costs.  We  also know that  we could  find no significant 
correlation  between  the  costs incurred  and  the  recipients  served  on an individual  State-
by-State  basis. 
The  predictability  issue  means  that  the  Federal  Government  is in the  position  of not 
knowing  how much  the  States  are  going to charge  in future  years.  While  predictions  can 
be  made  based  on historical  patterns,  there  is no assurance  that  there  will not  be years 
where  the  costs will be  higher  than  predicted.  This,  in fact,  has  occurred  in the  past. 
We believe  that  a lack  of accountability  and  predictability  in the  current  cost-based 
reimbursement  system  are  a vulnerability  for the  Federal  Government.  We believe  that 
1  the  current  system  should  be  replaced  by one  that  would  provide  adequate  funding  to the 
States,  along  with incentives  for efficient  operations  and  decreased  oversight  and 
monitoring  on the  part  of the  Federal  Government. 
ALTERNATIVE  FUNDING  OPTIONS  FOR ADMINISTRATIVE  COSTS 
The  primary  purpose  of this report  is to examine  alternative  funding  arrangements  for 
the  administration  of the  AFDC,  Medicaid,  and  Food  Stamp  programs.  We  offer  this as 
a follow-up  to the  broader  report  cited  above.  Here,  in this report,  we describe  options 
that  provide  incentives  to promote  greater  efficiency  in the  system  rather  than  relying on 
increased  monitoring  and  oversight  activities  which,  in turn,  add  to administrative  costs. 
We  present  five of many  possible  options  for funding  administrative  costs.  C)ur intention 
is to present  the  general  concepts  behind  these  options  in order  to assess  the  relative 
merits  of each.  We  fully expect  that  if one  of these  options  is implemented,  further 
refinement  and  adjustment  would  be  required.  Regardless  of which  option  is selected  for 
further  consideration,  it should  be  evaluated  against  certain  criteria.  These  criteria  are: 
1)	 Adequacy:  Funds  should  be  adequate  for the  effective  and  efficient  administration 
of these  programs. 
2)	 F?&i.bilzlyand Adm.hknztive  Relief  The  States  and  the  Federal  Government 
should  have  greater  flexibility in using their  administrative  funds,  and  reduce  the 
administrative  burden  by cutting  back  on the  need  for data  collection  and 
intensive  monitoring. 
3)  Chr&:  The  rate  of growth  of administrative  costs should  be  controlled. 
4)  -S  Fundingdisparity  among  the  States  should  be  reduced. 
5)	 Bedictubility:  There  should  be greater  predictability  in the  system  as a result  of 
prospective  planning  and  budgeting  for administrative  costs. 
We  summarize  the  five alternative  funding  options  below. 
option 1:  Reduce  Medicaid  Special  Match  Rates  to 50 Percent.  This  option  would 
reduce  special  match  rates  to 50 percent  for the  Medicaid  program,  similar  to the 
reduction  that  has  occurred  for the  AFDC  and  Food  Stamp  programs.  This  option 
would  result  in reduced  Federal  expenditures  for administrative  costs, but  would  not 
reduce  the  administrative  burden  or disparity  among  States.  It would  not  enhance 
predictability  for budgeting  purposes. 
option  2  Block  GranL  This  option  would  combine  the  administrative  costs  of  all three 
programs  at a base  year  level, then  provide  inflationary  increases  each  succeeding  year. 
This  approach  would  reduce  the  administrative  burden  and  enhance  budgeting 
predictability.  It would  reduce  Federal  costs  in so far as the  rate  of increase  under  the 
ii 
  current  system  is larger  than  inflation.  It would  have  no impact  on the  disparity  among 
States.  It is not  flexible  enough  to account  for changes  in caseload  or other  special  needs 
that  might  arise  within  an individual  State, 
Option  3:  Standard Cost Per  Recipient.  This  option  would  fund  each  State  for 
administrative  costs  based  on  a standard  per  recipient  allocation  amount.  Under  this 
option,  the  disparity  among  States  would  be  addressed  and  the  administrative  burden  for 
the  Federal  Government  and  the  States  would  be  reduced.  This  option  may  or  may  not 
generate  Federal  savings depending  on certain  factors  such as the  number  of recipients  in 
the  program.  In years  where  there  is a large  increase  in the  number  of recipients,  this 
option  could  be  more  costly than  the  current  system.  It would  not  provide  for  any 
special  needs  of one  State  in comparison  to others. 
option4  CostPer Recipient  Cap.  This  option  imposes  a cap  on the  Federal 
reimbursement  of the  cost per  recipient.  States  would  be  reimbursed  for their  full 
recipient  cost up  to a set,  predetermined  percentage  above  the  national  median  cost per 
recipient.  Under  this  option,  there  would be  reduced  disparity  between  the  lowest  and 
highest  cost States.  It would  allow for some  differences  in costs among  the  States,  but 
not  for  excessive  differences.  Savings would  be  generated  by reducing  the  amount  of 
Federal  administrative  funds  going to the  highest  cost States. 
@tion 5:  Hat  Percentage.  States  would  be  reimbursed  for  their  administrative  costs on 
the  basis  of their  ratios  of administrative  cost to total  program  cost.  This  option  reduces 
the  administrative  burden  but  may not  reduce  the  disparity  among  States.  Given  the 
recent  high rate  of growth  in program  costs, the  Federal  Government  would  actually 
spend  more  on administrative  costs under  this option  than  it spends  currently. 
CONCLUSION 
The  issue  of reforming  the  administrative  cost allocation  system  is very relevant  today 
given the  considerable  interest  in reinventing  Federal  Government  operations.  If action 
is not  taken,  we will continue  to have  a system  that  lacks sufficient  accountability  and 
predictability,  and  relies  on enhancing  our  monitoring  capabilities. 
The  alternative  funding  approaches  that  we have  outlined  are  meant  to serve  as 
examples  of what  can be  done.  Furthermore,  some  combination  of options  might  have  a 
number  of advantages.  For  example,  the  block  grant  alternative  could  be  combined  with 
the  standard  cost per  recipient  approach. 
This  report  focuses  on only three  of the  many  programs  for which  the  Federal 
Government  reimburses  States  for administrative  costs.  We  focus  on AFDC,  Medicaid, 
and  Food  Stamp  administrative  costs because  they  constitute  the  bulk  of administrative 
costs for Federal  public  welfare  programs.  However,  we believe  that  the  ultimate 
objective  should  be  to reexamine  the  administrative  cost allocation  systems  of all Federal 
programs. 
... 
111  AGENCY  COMMENTS 
We  received  comments  on the  draft  report  from  the  Assistant  Secretary  for Management 
and  Budget,  the  Assistant  Secretary  for Planning  and  Evaluation,  and  the  Assistant 
Secretary  for Children  and  Families.  They  state  that  we have  not  necessarily 
demonstrated  a serious  problem  in this area,  expressed  concerns  about  the  way we 
estimated  future  costs and  possible  savings, and  pointed  out  that  there  may be valid 
reasons  for some  disparities  in costs among  the  States.  The  Administration  for Children 
and  Families  also requested  a fuller  discussion  of the  pros  and  cons of the  various 
funding  alternatives.  See  full text  of comments  at Appendix  B,  The  Health  Care 
Financing  Administration  provided  informal  comments  on earlier  drafts,  but  did not 
provide  comments  on the  latest  one. 
We recognize  the  legitimate  concerns  that  have  been  raised  and  have  considered  them 
carefully.  We have  revised  the  report  in several  places,  primarily  to focus  more 
succinctly  on the  need  to change  the  current  system  and  to update  our  savings 
projections  based  on the  latest  available  data.  We  also  are  including  more  detailed 
responses  in Appendix  B to the  issues  raised. 
At  this point  we believe  that  we have  an  honest  disagreement  about  the  extent  of this 
problem  and  its appropriate  solution.  Perhaps  this disagreement  stems  from  differences 
in overall  focus. 
The  agency  comments  focus  on whether  total  costs within  the  current  system  are  out  of 
control.  There  is some  evidence  offered,  such as recent  declines  in cost  per  recipient 
data  and  a Ievelling  off of the  rate  of increase  in Federal  costs,  that  there  is no real 
problem  here.  We  have  reservations  about  the  significance  of these  indicators  and  we 
address  them  within  the  report  itself.  More  importantly  though,  we think  that  these 
indicators  do not  address  the  most  important  issue. 
We  think  that  the  real  issue is the  current  cost reimbursement  system  itself.  The  system 
puts  us at risk because  we have  difficulty knowing  what  we are  paying  for, whether  it is 
cost effective,  and  what  we will have  to pay out  in the  future.  It provides  little  incentive 
to  economize,  and  is itself  an  inefficient  system. 
Agency  comments  also  caution  that  our  proposals  could  harm  some  States  by not  taking 
into  account  their  peculiar  needs.  We see  similar  problems  of inequity  with the  current 
system. 
Thus,  we continue  to believe  that  the  current  cost reimbursement  system  for welfare 
administrative  costs needs  to be replaced  for the  following  reasons. 
o	 Under  the  current  system  we are  not  sure  of what  we are  paying  for and 
whether  expenditures  are  cost-effective.  It would  require  a considerable 
investment  in expanded  auditing  and  monitoring  to find out.  These  costs 
would  be  prohibitive  especially  in an environment  of declining  resources. 
iv 
  Our  Office  of Audit  Services  has reported  that  the  current  cost  allocation 
system  results  in mountainous  papexwork,  labyrinthine  accounting  and 
detailed  auditing  and  negotiation  processes. 
o	 We  can  not  predict  with any degree  of certainty  under  the  current  system 
what  the  States  are  going to charge  us in the  future.  This  issue becomes 
very important  in thinking  about  how much  the  Federal  Government  wants 
to pay for administrative  costs under  welfare  reform. 
o	 There  is significant  cost disparity  among  the  States,  without  any clear 
relation  to outcomes.  While  there  are  reasons  offered  for some  disparity, 
there  is no solid evaluated  data  that  rules  out  efficiency  as a factor  in cost 
disparity.  We  also could  find no significant  correlation  between 
administrative  costs and  numbers  of recipients  on an individual  State-by-
State  basis. 
For  these  reasons,  we believe  that  the  current  cost allocation  system  should  be  replaced 
by a system  that  provides  adequate  funding  for States,  incentives  for efficient  operations, 
decreased  Federal  monitoring  and  oversight,  and  predictable  Federal  expenditures.  We 
think  that  the  options  presented  in this report  are  a good  place  to start  in developing  a 
new welfare  administrative  cost system. 
We want  to caution  the  reader  that  the  dollar  estimates  for the  various  options  are 
illustrative  only.  In further  developing  a new administrative  cost system,  it will be 
necessary  to prepare  detailed  estimates  based  on clearly  defined  assumptions,  using the 
most  recent  information  available. 
v  TABLE  OF  CONTENTS 
PAGE	
ExEmmvE  suMMARY	
INTRODUCTION  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...1	
PROBLEMS  WITH THE  CURRENT	
COST REIMBURSEMENT  SYSTEM...  . . . . . . . . . . . . . . . . . . . . . . . . . . ...5	
ALTERNATIVE  FUNDING  OPTIONS  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  9

CONCLUSION  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...18	
APPENDICES	
k  Administrative  Costs  and  Recipients,  1989-1993  . . . . . . . . . . . . . . . . . . . . . .  A-1

BAgency  Comments  andOIG  Response  . . . . . . . . . . . . . . . . . . . . . . . . . . . ..B-l

C  Endnotes  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..C-l
 INTRODUCTION 
PUIU?OSE 
To  examine  alternative  funding  arrangements  for administrative  costs in the  Aid to 
Families  with Dependent  Children  (AFDC),  Medicaid  and  Food  Stamp  programs. 
BACKGROUND 
The  AFDC  program  (Title  IV-A)  provides  cash  assistance  to low-income  families  with

children  in which  one  parent  is absent  or incapacitated,  or to families  in which  the

primag  earner  is unemployed.  The  Medicaid  program  provides  medical  assistance  to

low-income  people  who  are  recipients  of Supplemental  Security  Income,  current  or

recent  recipients  of AFDC,  and  certain  other  low-income  people.  These  programs  are

administered  by the  Administration  for Children  and  Families  (ACF)  and  the  Health

Care  Financing  Administration  within  the  Department  of Health  and  Human  Services

(HI-E).  The  Food  Stamp  program,  administered  by the  Food  and  Nutrition  Service

(FNS)  in the  Department  of Agriculture,  provides  redeemable  coupons  for food  to

low-income  households  to enable  them  to buy a nutritionally  adequate  low-cost  diet.

In  1993, States  charged  the  Federal  Government  approximately  $5.7 billion  to

administer  the  AFDC,  Medicaid  and  Food  Stamp  programs.  The  Federal

Government  pays half of the  administrative  cost for most  types  of administrative

activities  in all three  programs  and  State  and  local  governments  pay the  remaining

share.  In general,  States  have  considerable  latitude  in defining  their  administrative

costs.  Costs  need  only be  considered  reasonable  and  necessary  as outlined  in OMB

Circular  A-87, Cost Principles  for State  and  Local  Governments.1

Administrative  costs  are  the  expenses  States  incur  to administer  their  programs.  They

are  not  easily defined  since States  claim  and  categorize  their  administrative  costs

differently.  In general,  however,  administrative  costs include  such things  as computer

services,  transportation  and  salaries  that  are  billed  directly  to an agency  or program

and  allocated  costs which  are  shared  with  other  agencies  or programs.  The  majority

of administrative  funds  pay for staff at  the  State  and  local  levels  to perform  a wide

variety  of tasks.  These  activities  include:  the  cost of determining  eligibility  for all

applicants,  setting  the  allotments  for eligible  households,  making  changes  in a

recipients  status  over  time  and  other  administrative  tasks.  Higher  matching  rates

have  been  developed  for some  types  of expenses  as an incentive  for local

administrators  to engage  in particular  administrative  activities,  such  as statewide

comprehensive  systems  development,  training,  and  some  anti-fraud  activities.

1
 In  1986, our  Office  of Evaluation  and  Inspections  published  a report  in response  to 
questions  raised  about  rising administrative  costs.  That  report,  entitled:  Inspectionof 
AFDC,  Medicaid  and  Food  Stamp  Administrative  Costs (OAI-05-86-OOO08), examined 
the  wide  cost variation  among  States  and  the  overall  increase  in cost.  It suggested  an 
alternative  method  for funding  administrative  costs that  would  reduce  costs  overall  and 
reduce  the  variation  between  States.  This  proposal,  however,  was not  implemented. 
Since  1986, other  groups  have  made  the  following  proposals  on this issue: 
In  1987, HI-IS authored  a legislative  proposal  to reduce  the  matching  rates  for 
administrative  costs in the  AFDC,  Medicaid  and  Food  Stamp  programs.  Under  the 
proposal,  matching  rates  were  reduced  for costs in excess of 125 percent  of the 
median  for the  AFDC  and  Food  Stamp  programs  and  135 percent  of the  median  for 
Medicaid.  At that  time,  HHS  also proposed  eliminating  enhanced  matching  rates.  In 
addition,  the  Assistant  Secretary  for Planning  and  Evaluation  has examined  this issue 
extensively. 
The  Office  of Management  and  Budget  (OMB)  proposed  creating  a fixed grant  at the 
current  Federal  spending  levels.  In addition,  it is in the  process  of revising  circular  A-
87, Cost Principles  for State  and  Local  Governments,  which  establishes  the  standards 
for determining  administrative  costs. 
Congress has  also shown  some  interest  in this issue.  The  H.R.  5552, introduced  in 
July  1992  proposed  a combined  grant  to States  for administrative  costs of AFDC, 
Medicaid  and  the  Food  Stamp  programs. 
The  Congressional  Budget  Oflice  has  also proposed  combining  funding  to States  for 
the  cost of administering  AFDC,  Medicaid  and  the  Food  Stamp  program  into  a single 
indexed  grant.2 
In  1988, the  National  Association  of State  Budget  Officers  and  the  National 
Governors Association  proposed  their  own reform  measure.  They  proposed 
development  of a combined  administrative  rate  for the  AFDC,  Medicaid  and  Food 
Stamp  programs.  The  rate  would  be based  on the  historic  ratio  of administrative 
funds  to total  benefit  payments  for each  State.  The  goal was to reduce  the  papenvork 
burden  and  create  cost savings for State  and  Federal  Governments.  They  advanced 
their  idea  as a demonstration  program,  but  it was not  implemented.  States  were 
concerned  that  the  proposal  would  make  administrative  costs vulnerable  to Federal 
cost cutting  measures. 
We have  also been  very involved  in this area  through  our  Office  of Audit  SeMces. 
We have  worked  with OMB  to revise  Circular  A-87 and  have  produced  numerous 
reports  on this issue.  Most  recently  we issued  a report,  Reforming  the  System  for 
Determination  of State  and  Local  Government  Administrative/Indirect  Costs 
2
 (A-12-92-OO014).  We received  about  115 comments  from  22 Office  of Inspectors 
General  and  Financial  Management  Offices  representing  13 Federal  agencies,  and 
incorporated  them  into  the  report.  The  report  describes  the  current  system  as, 
unnecessarily  burdensome  to Federal,  State  and  local  govemments.3  Furthermore, 
it suggests  that,  a new system  can be  devised  to eliminate  or at least  minimize,  the 
mountainous  papenvork,  multiple  cognizance  arrangements,  labyrinthine  accounting 
and  detailed  auditing  and  negotiation  processes.  Such a system  would  benefit  both  the 
States  and  the  Federal  Government  by reducing  administrative  burdens  and  costs.4 
The  report  offers  a range  of options,  from  expanding  monitoring  efforts  and  reforming 
cost allocation  guidelines  to more  far  reaching  suggestions  to dispense  with the 
current  arcane  system  and  establish  an equitable  level of reimbursement  over  time.5 
One  specific  proposal  was to award  a single administrative  cost grant  for public 
assistance  programs. 
In addition  to these  past  initiatives,  the  current  Administration  proposed  that  the 
Federal  reimbursement  rate  be  set at a uniform  50 percent  for all administrative  costs. 
That  is, they  proposed  reducing  the  special  matching  rates  to 50 percent.  The  first 
option  in this report  supported  this proposal.  Since  issuing the  working  draft  of this 
report,  this option  was enacted  into  law for the  AFDC  and  Food  Stamp  program. 
Special  rates  remain,  however,  in the  Medicaid  program. 
SCOPE 
This  inspection  focuses  on possible  solutions  to concerns  specified  in our  Office  of 
Audit  Services  report.  We  present  five different  options  for funding  public  assistance 
administrative  costs through  a single grant.  These  represent  only some  of the  many 
methods  that  might  be  used  to fund  administrative  costs.  Many  have  been  proposed 
previously  in various  forms.  We  present  these  options  again  to help  focus  the 
discussion  on the  issue  of administrative  costs and  to further  clarify the  costs  and 
benefits  to the  States  as well as to the  Federal  Government.  We believe  that  there  is 
widespread  interest  in improving  the  current  system,  but  there  is little  consensus  on 
how this should  be  done. 
This  report  focuses  on only three  of the  many  programs  for which  the  Federal 
Government  reimburses  States  for administrative  costs.  We focus  on the  AFDC,  Food 
Stamp  and  Medicaid  programs  because  they generate  most  of the  administrative  costs 
for federally  supported  public  welfare  programs.  However,  we recognize  the  risk that 
States  may shift administrative  costs to other  programs  (although  there  would  be  some 
practical  limits  as to how much  cost shifting  could  occur).  Therefore,  we believe  that 
the  overall  objective  should  be  to re-examine  the  administrative  cost of all Federal 
programs.  The  ideas  presented  here  for the  AFDC,  Medicaid,  and  Food  Stamp 
programs  might  well be  adapted  to other  programs  and  could  be  used  in conjunction 
with an overall  reform  of the  cost allocation  system  suggested  in the  OffIce  of Audit 
Services  report. 
3
 We  do not  include  funding  for Medicaid  Fraud  Control  Units  in our  analysis,  since, by 
law, they  must  be  administered  by State  agencies  independent  of the  ones  that 
administer  the  Medicaid  program. 
METHODOLOGY 
Pre-Ins~ection  Activities

During  pre-inspection,  we reviewed  the  following  materials:  OMBCircular  No. A-87,

Office  of Inspector  General  (OIG)  reports  on administrative  costs, and  other  materials

protided  bythe&sistant  SecretaV  for Planning  and  Evaluation  (SPE).  In addition,

we spoke  with  people  from  the  Division  of Cost  Allocation  (regional  and

headquarters),  ASPE,  and  our  Office  of Audit  Semites.  We held  an  entrance

conference  on September  9, 1992 with representatives  from  the  Administration  for

Children  and  Families,  ASPE,  the  Department  of Agriculture  and  other  OIG  staff.

Insr)ection  Activities

We  collected  the  following  data  on a State-by-State  basis  for Fiscal  Year  (FY)  1982 to

N  1993.  Total  program  and  administrative  costs for the  AFDC  program  were  not

available  for FYs  1982-1986.

Total  Program  (AFDC,  Food  Stamp,  Medicaid)  Budgets

Total  Administrative  Costs

Number  of Recipients

For  the  purposes  of this study we used  State  generated  data  provided  to us by ACF, 
HCFA  and  FNS.  We  did not verify the  data.  We  are  aware  that  the  States  and  the 
agencies  define  administrative  costs and  collect  their  data  differently,  thus,  the  data 
may not  be  perfectly  comparable  among  States  and  between  programs.  Total 
recipient  data,  for example,  are  reported  as an annual  average  number  of persons 
participating  in the  program  for the  AFDC  and  Food  Stamp  programs.  Alternatively, 
Medi&iid  collects  an  annual  total  recipient  count.  While  the  data  may not  be  exactly 
comparable  betsveen  programs,  it is the  best  available.  We  feel  confident  that  it is 
appropriate  for this analysis. 
We held  an exit conference  on March  30, 1993 with representatives  from  each  of the 
agencies,  ASP~  and  the  Office  of Inspector  General  in the  Department  of 
Agriculture. 
We  received  numerous  HHS  staff comments  on our working  draft  and  made  many 
changes  based  on the  advice  we received. 
This inspection  was, conducted  in accordance  with the  Quality Standardr for Inspections 
issued  by the  Presidents  Council  on Integrity  and  Efficiency. 
4  PROBLEMS  WITH THE  CURRENT  COST REIMBURSEMENT  SYSTEM 
One  of the  primary  problems  with the  current  system  is that  the  Federal  Government 
cannot  readily  determine  what  is included  in the  administrative  costs claimed  by States. 
Furthermore,  the  cost to accurately  determine  what  the  funds  are  paying  for is 
prohibitive.  This would  require  increased  Federal  spending  for maintaining  the  necessary 
monitoring  systems  and  expanding  auditing  activities. 
Meanwhile,  administrative  costs vary considerably  among  States,  even  among  those  with 
similar  characteristics.  On  the  face  of it, it would  seem  that  some  States  are  being  very 
efficient  and  others  are  less efficient.  Yet,  no one  knows for sure  what  the  real  cost 
should  be. 
In short,  the  current  method  for reimbursing  States  for welfare  administrative  costs is 
unwieldy  and  unpredictable,  both  for the  Federal  Government  and  for the  States.  We 
believe  that  the  current  system  should  be  replaced  with one  that  would  provide  adequate 
fimding  to States,  along  with incentives  for  efficient  operations  and  decreased  oversight 
and  monitoring  on the  part  of the  Federal  Government. 
We  present  five of many  possible  options  for funding  administrative  costs.  Under  most 
of these  options  the  States  could  realize  greater  flexibility in using their  funds  and 
perhaps  increase  efficiency  in their  operations.  Under  some  options  States  would  receive 
more  equitable  funding  than  under  the  current  system.  In addition,  Federal  cost 
allocation  and  monitoring  processes  could  be simplified  and  significant  savings achieved. 
The  remainder  of this report  is divided  into  three  sections.  The  first section  examines 
several  of the  main  issues inherent  in the  current  administrative  cost system.  The  second 
section  presents  five options  for funding  administrative  costs for these  three  programs. 
The  options  are  evaluated  according  to several  criteria.  The  last section  provides  some 
final  observations  about  the  five options. 
Unexdained  Dismuitv  Among States 
Significant  differences  exist among  States  in their  unit  cost  (i.e., cost per  recipient)  for 
administering  the  three  programs.  Table  1 lists the  States  alphabetically  and  shows the 
FYs  1989-1993 average  combined  cost per  recipient  along  with  each  States  average 
ranking  for the  same  period.  On  average,  New Jersey  and  Oregon  have  been  among  the 
highest  cost States  during  our  5 year  analysis  period,  with an average  cost  per  person  of 
$251 and  $232, respectively.  This is a significant  contrast  to States -like Texas  and  Illinois 
which  operated  at $107 and  $124 per  person,  respectively. 
A multitude  of anecdotal  explanations  have  been  offered  as to why such  disparities  exist: 
cost-of-living  differences,  complexity  of caseloads,  stringency  of eligibility  requirements, 
schedule  of automated  systems  development,  differences  in the  delivery  of program 
services,  and  cost  allocation  methodologies.  In addition,  some  States  may be  operating 
5  >>>TABLE  1<<< 
AVERAGE  STATE  ADMINISTRATIVE	 COST  PER  RECIPIENT  (CPR)  AND  AVERAGE  RANKING 
FY  1989  - FY  1993 
--------- -------
Combined  Average 
Average  CPR  Rank 
--------- -------
A labame
 $100.14  48 
Alaska
 323.39  1 
Arizona
 213.36  9 
Arkansas
 111.66  43 
Cal  ifornia
 163.84  25 
Colorado
 142.69  32 
Connect  i cut
 194.93  15 
Delaware
 222.04  7 
Dist.  of  Col.
 285.70  2 
Florida
 124.30  38 
Georgia
 144.97  31 
Guam
 237,54  5 
Hawaii
 169.79  22 
Idaho
 209.23  10 
Illinois
 123.54  39 
Indiana
 111.22  44 
Iowa
 121.81  40 
Kansaa  135.79  34 
Kentucky  100.57  47 
Louisiana  74.45  51 
Maine  135.19  35 
Maryland  186.18  19 
Massachusetts  166.32  24 
Michigan  151.68  29 
Minnesota  215.23  8 
Mississippi  65.58  52 
Missouri  97.15  49 
Mont ana  190.04  17 
Nebraska  152.97  28 
Nevada  188.56  18 
New  Hampshire  206.47  11 
New  Jersey  250.79  3 
New  Mexico  113.70  42 
New  York  247.55  4 
North  Carol  ina  130.10  37 
North  Dakota  180.33  21 
Ohio  104.77  46 
Oklahcma  198.24  14 
Oregon  231.82  6 
Pennsylvania  154.65  27 
Puerto  Rico  19.65  54 
Rhode  Island  114.10  47 
South  Carol  ina  141.16  33 
South  Dakota  131.30  36 
Tennessee  91.25  50 
Texas  106.87  45 
Utah  198.67  13 
Vermont  205.61  12 
Virgin  Islands  168.85  23 
Virginia  160.06  26 
Washington  181.87  20 
West  Virginia  62.26  53 
Ui scmai  n  148.96  30 
Uyoming  193.14  16 
AVERAGE  $159.30 
NOTE:  Federal  Share  Only  much  more  efficiently  than  others.  Thus,  some  variation  between  States  should  be 
expected  due  to the  many  differences  between  States.  However,  there  is no consensus 
on how much  variation  should  exist or the  extent  to which  each  of these  factors 
influences  variation. 
Burden of Accmntabilitv  and oversitit 
In order  to accept  the  contention  that  increased  program  responsibilities  are  leading  to 
increased  administrative  costs, there  must  be  data  that  will assure  that  the  cost increases 
are justified.  But verification  through  audits  and  other  monitoring  activities  is extremely 
costly.  In fact,  our  Office  of Audit  Services  points  out  that  efforts  to veri~  State 
administrative  costs may not  be  feasible.  They  emphasize  that,  The  auditing  of costs ... 
require  an  enormous  amount  of resources,  is very difficult,  time  consuming  and  labor 
intensive  with little  relative  payoff.  Even  after  unallowable  costs are  identified  a 
reasonable  estimate  or extraordinary  costing  effort  has  to be  made  as to the  dollar 
impact  on all Federal  programs  at the  State.G 
In addition  to veriijhg  State  plans,  the  current  lack of accountability  is itself  a problem. 
Because  of limited  staff  resources  and  significant  time  constraints,  HHS  is not  able  to 
make  detailed  reviews  of all the  plans.  Instead,  HHS  must  rely on State  audits.  There  is 
concern  about  whether  these  cost allocation  plans  are  adequately  screened  for 
unallowable  costs being  improperly  charged  to Federal  programs. 
Questions  about Costs and Workload 
Total  administrative  costs have  risen  significantly  over  the  past  5 years,  however,  each  of 
the  three  programs  has grown  at  different  rates.  Between  FY  1989-1993, total 
administrative  costs increased  37 percent  overall.  This is roughly  18 percent  above  the 
growth  due  to inflation.  During  this period,  administrative  costs in the  Medicaid  program 
increased  by 39 percent  after  inflation  and  the  Food  Stamp  program  grew by 13 percent. 
The  AFDC  administrative  costs actually  decreased  by 4 percent  after  taking  inflation  into 
account  (See  Appendix  ~  Table  1). 
The  number  of recipients  increased  much  more  rapidly  than  usual  during  this time 
period.  In the  AFDC  program,  the  number  of recipients  increased  by 29 percent,  the 
Medicaid  programs  by 42 percent  and  the  Food  Stamp  program  by 44 percent  (See 
Appendix  ~  Table  2). 
One  obvious  conclusion  from  this data  might  be  that  the  growth  in the  number  of 
recipients  increased  administrative  activities  in States,  thus  resuhing  in increased 
administrative  costs.  In fact,  the  cost of administering  these  programs  has  actually 
decreased  as measured  by the  unit  cost  (cost  per  recipient).  For  example  in FY  1989, 
the  AFDC  cost per  recipient  was $145 per  recipient;  in FY  1993 that  cost had  decreased 
to $107 per  recipient.  The  Medicaid  and  Food  Stamp  programs  also experienced  similar 
decreases  (See  Appendix  ~  Table  3). 
6
 A more  detailed  analysis  of the  data  show this to be  an incomplete  interpretation.  It is 
important  to note  that  the  data  yield different  results  depending  on what  years  are 
chosen  for  analysis.  Had  we begun  our  analysis  in FY  1987 instead  of FY  1989, we 
would  see  that  costs per  recipient  increased  rapidly  and  peaked  in 1989 then  began  to 
decrease  to more  typically  historic  levels in the  Medicaid  and  Food  Stamp  programs  (cost 
data  was not  available  for the  AFDC  program,  1982-1986).  In addition,  there  have  been 
dramatic  fluctuations  in the  rate  of growth  of recipients  within  the  last 5 years.  Growth 
rates  range  from  14.4 percent  to  5.9 percent. 
Furthermore,  a State-by-State  analysis  of the  linkage  between  costs  and  workload  on an 
annual  basis  demonstrates  a disconnect  between  the  amount  of money  being  spent  and 
the  number  of recipients.  During  some  years,  both  the  number  of recipients  and 
administrative  costs increase  together,  however,  they increase  at varying  rates.  In other 
years  administrative  costs increase  and  recipients  decrease,  and  there  are  other  instances 
where  recipients  increase  and  administrative  costs go down. 
The  following  two States  are  typical  examples  of the  disconnect  between  administrative 
cost and  recipient  increases.  In New Jersey  for example,  annual  changes  in 
administrative  costs between  1989 and  1993 were:  13.5 percent,  -5.6 percent,  19.8 
percent,  7.8 percent  and  -3.0 percent  respectively.  In comparison,  the  annual  changes  in 
the  estimated  unduplicated  count  of recipients  were:  -1.6 percent,  6.2 percent,  10.6 
percent  11.0 percent  and  8.4 percent,  respectively.  Similarly,  in Utah,  the  increase  in 
administrative  costs were:  9.8 percent,  -5.7 percent,  19.5 percent,  21.2 percent  and  2.3 
percent.  Correspondingly,  increases  in the  number  of recipients  were:  5.9 percent,  8.6 
percent,  13.7 percent,  8.6 percent,  and  6.7 percent. 
These  are  not  isolated  examples.  We calculated  correlation  coefficients  to determine 
whether  the  annual  changes  in administrative  costs are  related  to the  changes  in the 
number  of recipients  for each  State  and  ternto~.  The  correlation  coefficients  fail to 
show any significant  correlation  between  these  two factors  (see  Appendix  ~  Table  4). 
These  results  cause  us to further  question  the  nature  and  magnitude  of the  relationship 
between  administrative  costs and  recipients. 
Thus, there  must  be  factors  other  than  number  of recipients  that  are  influencing  the 
increased  administrative  costs.  We believe  that  this disconnect  is another  indication  of 
the  unpredictable  and  somewhat  unknown  nature  of the  current  administrative  cost 
system. 
Proiected  Administrative  Costs FY  1995- FY  1999 
It is extremely  difficult  to estimate  future  costs.  So much  depends  on underlying 
assumptions  and  on future  events  which  are  inherently  unpredictable. 
As noted  in the  previous  section,  we were  unable  to correlate  programmatic  factors  such 
as workload  with administrative  costs.  We believe  that  historical  cost patterns  are  the 
best  predictors  of future  spending.  Therefore,  to estimate  the  level  of administrative 
7  costs under  the  current  system  to FY  1999, we took  each  States  administrative  cost in 
FY  1993 as the  baseline  amount.  We then  increased  that  baseline  amount  by the  States 
average  annual  rate  of growth  in administrative  costs from  FYs  1989-1993 (see  Table  2). 
For  example,  Alabamas  administrative  costs grew an average  of 7.4 percent  annually 
from  FY  1989-FY  1993.  Therefore,  to project  Alabamas  administrative  costs, we 
increased  the  FY  1993 amount  by 7.4 percent  each  year  until  FY  1999. 
On average,  administrative  costs increased  by about  8.7 percent  for  all States  annually. 
We project  that  the  total  Federal  share  of administrative  costs will be  $9.5 billion  in FY 
1999 (this figure  is adjusted  for savings achieved  by the  reduction  in special  match  rates 
for the  AFDC  and  Food  Stamp  programs)  if the  current  system  remains  unchanged. 
This would  be  a 64.9 percent  increase  over  the  FY  1993 amount  of $5.7 billion. 
Other  factors,  such as workload  and  inflation,  will affect  actual  State  expenditures  in ways 
that  we cannot  easily foretell.  As a result,  actual  expenditures  under  current  law and 
savings under  the  various  options  we describe  could  be more  or less than  we project. 
We  continue  to be  concerned  that  an open-ended  cost  reimbursement  system,  especially 
one with  poorly  defined  cost elements,  does  not  provide  sufilcient  incentives  for an 
efficient  and  effective  administrative  cost system  for public  assistance  programs.  In 
addition,  we believe  that  with  renewed  focus on major  changes  in the  current  welfare 
system,  there  will be  increased  pressure  on administrative  costs to expand. 
8
 >>>  TABLE  2  <<< 
ADMINISTRATIVE  COST  PROJECT ION 
($  in  thousands) 
FY89-93 
Avg  Inc  1995  1996  1997  1998  1999 
------ ----- ----- ----- ----- -----
Alabama  7.4%  $71,078  $76,329  $81,968  $88,024  $.94,527 
Alaska  14.1%  31,456  35,884  40,934  46,695  53,267 
Arizona  16.2%  125,179  145,485  169,087  196,517  228,396 
Arkansas  8.3%  48,968  53,011  57,388  62,126  67,256 
California  11.1%  1,135,574  1,261,276  1,400,891  1,555,961  1,728,197 
Colorado  5.7%  49,817  52,660  55,666  58,843  62,202 
Connect  i cut  3.6%  67,241  69,637  72,118  74,688  77,350 
Delaware  14.5%  20,929  23,972  27,458  31,451  36,024 
Dist.  of  Col.  41,035  43,354  45,805  48,394  51,129 
Florida  1::3  250,760  276,249  304,330  335,265  369,345 
Georgia  8.0%  161,838  174,742  188,676  203,720  219,963 
Hauai  i  4.4%  24,798  25,895  27,040  28,236  29,484 
Idaho  12.2%  26,4Zf  29,696  33,312  37,368  41,918 
Illinois  7.1%  258,668  276,958  296,540  317,508  339,957 
Indiana  9.2%  84,405  92,184  100,680  109,959  120,094 
I oua  5.3%  43,992  46,329  48,791  51,383  54,113 
Kansas  7.6%  44,646  48,050  51,713  55,656  59,900 
Kent ucky  9.1%  96,062  104,849  114,441  124,911  136,338 
Louisiana  9.1%  95,074  103,757  113,232  123,573  134,858 
Maine  7.2%  29,204  31,303  33,554  35,966  38,551 
Maryland  12.0%  141,346  158,309  177,308  198,586  222,418 
Massachusetts  -0.4%  122,600  122,072  121,546  121,023  120,501 
Michigan  6.6%  287,273  306,271  326,525  348,119  371,141 
Minnesota  13.1%  151,146  170,874  193,177  218,391  246,895 
Mississippi  5.2%  47,117  49,559  52,128  54,829  57,671 
Missouri  8.1%  87,991  95,119  102,825  111,155  120,160 
Mont ana  8.8%  20,695  22,525  24,517  26,684  29,044 
Nebraska  30,617  32,976  35,516  38,253  41,200 
Nevada  1;:2  25,755  29,660  34,158  39,337  45,302 
Ne~  Hanpsh  i re  8.3%  18,342  19,863  21,510  23,294  25,226 
Ne~  Jersey  6.5%  228,234  243,065  258,859  275,681  293,595 
Neti  Mexico  5.9%  34,367  36,377  38,506  40,759  43,743 
N- York  4.3%  802,607  836,891  872,639  909,915  948,782 
North  Carol  ina  9.1%  135,230  147,498  160,878  175,473  191,391 
North  Dakota  4.4%  13,468  14,065  14,688  15,339  16,019 
Ohio  11.2%  256,455  285,094  316,931  352,323  391,668 
Oklahoma  9.3%  102 #953  112,551  123,044  134,515  147,056 
Oregon  8.5%  99,285  107,752  116,941  126,913  137,736 
Pennsy[  vani  a  7.2%  292,963  313,914  336,363  360,417  386,192 
Rhode  Island  3.9%  19,920  20,703  21,517  22,363  23,242 
South  Carol  ina  5.4%  75,643  79,717  84,010  88,534  93,302 
South  Dakota  8.5%  11,962  12,979  14,083  15,281  16,581 
Tennessee  10.1%  111,870  123,207  135,694  149,447  164,593 
Texas  11.8%  401,196  448,519  501,424  560,569  626,691 
Utah  9.4%  42,989  47,050  51,494  56,358  61,682 
Vermont  11.0%  22,496  24,973  27,723  30,776  34,165 
Virginia  8.6%  126,428  137,318  149,147  161,994  175,948 
Uash i ngton  16.1%  192,836  223,921  260,017  301,932  350,603 
Uest  Virginia  9.5%  33,917  378133  40,652  44,506  48,725 
Ui sconsi  n  8.3%  99,213  107,482  116,441  126,147  136,661 
Uyomi ng  13.3%  12,595  14,268  16,163  18,309  20,741 
Guam  20.  9%  4,050  4,898  5,924  7,165  8,665 
Puerto  Rico  -6.6??	 11,469  10,938  10,431  9,948  9,487 
Virgin  Islands  9.1%  4,309  4,702  5,132  5,600  6,112 
TOTAL  8.7%  $6,776,532  $7,373,865  $8,031,535  $8,756,178  $9,555,207 
Sp  Hatch  Savings  (S80,000)  ( $90.  000)  ($90,000)  ($90.000)  ($90  , 000) 
ADJ  TOTAL  $6,696;  532  $7,283;  865  $7,941  ;535  $8,666;  178  $9;465;207  ALTERNATIVE  FUNDING  OPTIONS 
This  report  is an initial  step  in assessing  the  viability  of various  funding  options.  We 
recognize  that  there  are  numerous  ways of constructing  options.  Our  intention  is to 
present  the  general  concepts  behind  these  options  in order  to assess  the  relative  merits  of 
each.  We  fully expect  that  if one  or more  of these  options  is implemented,  further 
refinement  and  adjustment  would  be  necessary.  Regardless  of which  option  is selected 
for fin-ther consideration,  it should  be  evaluated  against  certain  criteria.  These  criteria 
are: 
1)	 A&quacy:  Funds  should  be  adequate  for the  effective  and  efficient  administration 
of these  programs. 
2)	 lZbibi@  und Adminhtmtive  Relief:  The  States  and  the  Federal  Government 
should  have  greater  flexibility in using their  administrative  funds,  and  reduce  the 
administrative  burden  by cutting  back  on the  need  for  data  collection  and 
intensive  monitoring. 
3)  C-:  The  rate  of growth  of administrative  costs should  be  controlled. 
4)  q:  Fundingdisparity  among  the  States  should  be  reduced. 
5)	 fiedicilzbildy:  There  should  be greater  predictability  in the  system  as a result  of 
prospective  planning  and  budgeting  for administrative  costs. 
The  five options  are: 
Reduce  Medicaid  Special  Match  Rates  to 50 Percent.  This  option  would  reduce  special 
match  rates  to 50 percent  for the  Medicaid  program,  similar  to the  reduction  that  has 
occurred  for  the  AFDC  and  Food  Stamp  programs. 
Block  Grant.  This  option  would  combine  the  administrative  costs of all three  programs 
at  a base  year  level, then  provide  inflationary  increases  each  succeeding  year. 
Standard  Cost  Per  Recipient.  This option  would  fund  each  State  for administrative  costs 
based  on a standard  per  recipient  allocation  amount. 
Cost  Per RqSpient  Cap.  This option  imposes  a cap  on the  Federal  reimbursement  of 
the  cost per  recipient.  States  would  be  reimbursed  for their  full recipient  cost up to a 
se~ predetermined  percentage  above  the  national  median  cost per  recipient. 
Flat  Percentage.  States  would  be  reimbursed  for their  administrative  costs  on the  basis 
of their  ratio  of administrative  cost to total  program  cost. 
9
 Our  purpose  in presenting  these  options  is to illustrate  the  various  methods  that  could  be

used  to distribute  Federal  funds  to the  States  and  to estimate  the  potential  financial

impact  of each  approach.  We  caution  that  the  level  of estimated  savings are  a direct

result  of the  assumptions  made  under  each  option.  To  underscore  this point  we

demonstrate  the  sensitivity  of the  options  by testing  how various  assumptions  under

Option  3 would  affect  the  results  (see  Option  3).  Policy makers  wishing to either

increase  or decrease  grants  to States  for administrative  costs  could  use these

methodologies.  The  important  goal in our  mind  is to control  the  amount  spent,  to relate

it to programmatic  goals,  and  to eliminate  administrative  costs and burdens  in dispensing

the  Federal  funds.

In the  following  analysis we describe  each  of the  five options,  provide  State  level

examples  of the  financial  impact,  and  assess  the  strengths  and  weaknesses  of each  option

according  to the  five criteria  listed  above:

OPTION  1:  REDUCE  MEDICAID  SPECIAL  MATCH  TO  50 PERCENT

Since  the  development  of this option,  the  special  match  rates  for the  AFDC  and  Food

Stamp  programs  has been  reduced  to 50 percent.  This  affects  all five options  equally  by

reducing  the  amount  of savings still achievable  by about  $80 million  in FY  1995 and  $90

million  in each  subsequent  year. 7  We  adjusted  for these  savings in all our  option

calculations.

Special  matching  rates  have  been  provided  to States  to encourage  specific  administrative

activities.  In the  AFDC  program,  for example,  the  Family  Assistance  Management

Information  System  was reimbursed  at  90 percent,  the  Systematic  Alien  Verification  for

Entitlement  at  100 percent,  and  control  of fraud  and  abuse  at 75 percent.  The  Medicaid

program  has  similar  types  of special  matching  provisions.  (NOTE:  Funding  for Medicaid

Fraud  Control  Units  matched  at  90 percent  start-up  and  75 percent  operating  costs is not

included  in our  analysis  since by law this program  is operated  independently  of the  State

agency  that  administers  the  Medicaid  program.)

one  alternative  for funding  administrative  costs is to reduce  the  special  matching  rates

that  exist for some  activities  in the  Medicaid  program  to  50 percent.  For  example,  the

development  and  operation  of management  information  systems  is currently  funded

anywhere  from  75 to 90 percent  for Medicaid.  Option  1 considers  reducing  these  special

matching  rates  to a uniform  50 percent  (see  Table  3).

To  calculate  administrative  costs under  this option,  we first determined  the  proportion  of

administrative  costs eligible  for the  special  match  rates  for each  State.  Then  we reduced

the  Federal  reimbursement  rate  to 50 percent.

10
 Impact 
Adequacy  There  would  be impact  on a portion  of Medicaid  administrative  costs.  Costs 
reimbursed  at the  special  matching  rates  accounted  for 27.9 percent  of all Medicaid 
administrative  funds  in FY  1993; 72.1 percent  would  remain  unaffected.  Of the  three 
programs,  Medicaid  administrative  costs would  be  affected  more  than  the  other  two 
programs  since  it has  the  largest  proportion  of special  matching  rates. 
The  impact  on special  matching  rate  activities  is unclear.  Special  match  rates  were 
provided  to encourage  States  to initiate  cost saving activities.  Since  many  of these  cost 
saving activities  (e.g. development  of MIS systems)  are  largely  in place,  these  special 
rates  may no longer  be  necessaxy.  However,  eliminating  the  special  match  rates  may 
reduce  State  investment  in cost saving activities. 
Flexibility  and Administrative Reliefi  This  option  would  have  virtually  no  impact  on 
Federal  and  State  administrative  burdens.  The  cost  allocation  system  would  remain  the 
same  except  that  all administrative  costs would  be  reimbursed  at 50 percent.  States 
would  gain  no additional  flexibility since  reimbursement  and  reporting  requirements 
would  not  change. 
Costs:  Based  on historical  data  through  FY  1993, we project  this option  would  reduce 
the  Federal  share  of administrative  costs by approximately  $2.3 billion  from  FYs  1995-
1999.. The  savings could  increase  or decrease  depending  on the  total  amount  which 
States  choose  to spend  in categories  affected  by the  higher  rates. 
Disparity  The  funding  gap  among  States  would  not  be  affected  for the  majority  of 
administrative  costs.  States  funding  levels would  decrease  proportionate  to the  amount 
spent  on activities  matched  at the  higher  rates. 
Predictability  This option  would  not  introduce  any additional  predictability  into  the  cost 
allocation  system  since  it would  remain  essentially  unchanged. 
11
 >>>  Table  3eec 
REDUCE  MEDICAID  SPECIAL  MATCH  RATES 
($ in  millions) 
FY  1995  FY  1996  FY  1997  FY  1998  FY  1999 
Total  Medicaid 
Administrative  $3,502  $4,022  $4,632  $5,350  $6,200 
Costs  (Projected) 
Amount  Provided 
at Special  Match  $977  $1,122  $1,292  $1,493  $1,730 
Rates 
Special  Match 
Rates  Reduced  to  $644  $739  $851  $983  $1,139 
50 Percent 
Savings  $333  $383  $441  $510  $591 
OPTION  2  BLOCK GRANT 
Under  Option  2, the  Federal  Government  would  provide  a block  grant  to each  State  to 
cover  administrative  expenses  for all three  programs.  For  illustrative  purposes,  we used 
an approach  that  combines  the  administrative  costs for the  three  programs  at their  FY 
1993 levels,  then  provides  an allowance  for inflation  in subsequent  years  (see  Table  4). 
To  calculate  the  Federal  share  of administrative  expenditures  under  a block  grant 
approach,  we combined  administrative  costs at the  FY  1993 levels.  Then  we increased 
the  block  grant  for inflation.  We adjusted  for savings already  realized  by the  AFDC  and 
Food  Stamp  programs  by the  reduction  in special  matching  rates  by subtracting  the 
estimated  savings amount  from  total  administrative  costs. 
lmlXK.1 
Adequacy  The  block  grant  option  does  not  reduce  the  baseline  amount  that  States  are 
currently  receiving.  It holds  the  rate  of increase  to the  rate  of inflation.  Policy and 
program  officials  should  select  the  base  year  and  growth  rate  that  will ensure  adequate 
funding  for States.  This  approach  might  need  some  mechanism  to occasionally  adjust 
funding  for overall  program  changes.  For  example,  if States  generally  experience  a 
significant  increase  in recipients,  the  block  grant  might  be  increased  to cover  larger 
administrative  costs.  Even  with such an overall  adjustment,  the  block  grant  approach 
does  not  automatically  adjust  funding  levels  to States  based  on State  specific  cost 
12  >>>  TABLE  4  <<< 
BLOCK  GRANT 
($  in  thousands) 
----------------------------------------------------------------
FY95  Ackn  FY96  A&  FY97  Adm  FY98  A&  FY99  Acin 
----.----- ---.------ --------------------------------------------
A 1abams  %5,325  %7,480  S69,  707  $72,077  $74,528 
Alaska  25,595  26,389  27,260  28,159  29,117 
Arizona  98,125  101,167  104,506  107,954  111,625 
Arkansas  44,241  45,613  47,118  48,673  50,328 
California  974,669  1,004,884  1,038,045  1,072,300  1,108,759 
Colorado  47,205  48,669  50,275  51,934  53 #700 
Connect  i cut  66,382  68.440  70,698  73,031  75,515 
Dela~are  16,891  17;414  17,989  18,583  19,214 
Dist.  of  Col.  38,924  40,131  41,455  42,823  44,279 
Florida  218,776  225;  559  233,002  240,691  248,875 
Georgia  146,986  151,543  156,544  161,710  167,208 
Hauai  i  24.081  24.827  25,647  26,493  27,394 
Idaho  22;  276  22;  967  23,725  24,508  25,341 
Illinois  2388909  246.315  254,444  262,840  271,777 
Indiana  74,924  77;  247  79,796  82,429  85,232 
Iowa  42,000  43,301  44,  i30  46,207  47,778 
Kansas  40.812  42.077  43 #466  44,900  46,427 
Kentucky  85;  378  88;025  90,930  93,930  97,124 
Louisiana  84,525  87,146  90,021  92,992  96,154 
Maine  26,914  27,748  28,664  29,610  30,616 
Maryland  119,309  123,007  127,066  131,260  135,722 
Massachusetts  130.940  134,999  139,454  144,056  148,954 
Michigan  267;611  275,907  285,012  294,417  304,427 
Minnesota  125.219  129,100  133,361  137,761  142,445 
Mississippi  45;  094  46,492  48,026  49,611  51,298 
Missouri  79,728  82,199  84,912  87,714  90,696 
Montana
 18,497  19.071  19,700  20,350  21,042 
Nebraska
 27,946  28;813  29,764  30,746  31,791 
Nevada
 20,562  21,199  21,899  22,622  23,391 
Ne~  Haqxh  i re
 16,561  17; 074  17,638  18,220  18,839 
Neu  Jersey
 213,071  219,677  226,926  234,415  242,385 
New  Mexico
 32,477  33,484  34,589  35,730  36,945 
Neu  York
 781,631  805,861  832,455  859,926  889,163 
North  Carol  ina
 120,360  124,091  128,186  132,416  136,918 
North  Dakota
 13,076  13,481  13,926  14,386  14,875 
Ohio
 219,729  226,541  234,017  241,739  249,958 
Oklahc+ns
 91.211  94.039  97,142  100,347  103,759 
Oregon
 89;255  92;  022  95,058  98,195  101,534 
Pennsylvania  a
 270,177  278,553  287,745  297,241  307,347 
Rhode  Island
 19,527  20,132  20,797  21,483  22,213 
South  CaroL  i na
 72,117  74,352  76,806  79,340  82,038 
South  Dakota
 10.758  11.091  11,457  11,835  12,238 
Tennessee
 97;655  100;682  104,004  107,437  111,089 
Texas
 339,890  350,427  361,991  373,936  386,650 
Utah
 38,001  39,179  40,472  41,807  43,229 
Vermont
 19,328  19,927  20,585  21,264  21,987 
Virginia
 113.476  116,993  120,854  124,842  129,087 
Uash i ngton
 151;427  156,122  161,274  166,596  172,260 
Uest  Virginia
 29,963  30.892  31,911  32,964  34,085 
Uisconsin
 89,507  92;282  95,327  98,473  101,821 
Uyomi ng
 10,392  10,715  11,068  11,433  11,822 
Guam
 2; 932  3,023  3,123  3,226  3,335 
Puerto  Rico
 13;352  13,766  14,220  14,690  15,189 
Virgin  Islands
 3,830  3,949  4,079  6,214  48357 
TOTAL
 $6,077,547  $6,266,081  S6,472,862  $6,686,536  $6,913,878 
Sp  Match  Saving
 ($80,  000 )  ($90,000)  ($90,000)  ($90  , 000)  ($90,000) 
AD.I  TOTAL
 $.5,997,547  %,176,081  $6,382,862  $6.596,536  %,823,878  problems.  For  example  if one  State  experienced  a significant  cost increase  for ADP

equipment  its share  of the  block  grant  would  not  increase  automatically.

Flexiiility and Administrative Reliefi  States  administrative  burden  would  be  significantly

reduced.  States  would  have  less reporting  requirements  to the  Federal  Government  since

they would  have  the  responsibility  for, and  control  the  use  of, funds  for administrative

activities.  This,  in turn,  would  reduce  the  cost and  administrative  burden  of oversight  and

monitoring  by the  Federal  Government.

CQStx  Based  on historical  data  through  FY  1993 and  using FY  1993 as the  base  year  for

calculating  inflationary  adjustments,  we project  Federal  savings of $8.1 billion  by FY

1999.  This  alternative  produces  the  greatest  savings of all the  options.  Savings  are

generated  by reducing  the  rate  of growth  in administrative  costs to the  level  of inflation.

This  is significantly  lower  than  the  estimated  9 percent  annual  rate  of increase  under  the

current  system  (see  Table  2).  As noted  earlier,  this estimate  of savings is very sensitive

to assumptions  regarding  inflation  and  State  fiscal policies,  both  of which  are  difficult  to

predict.  They  are  also sensitive  to the  discretionary  features  of the  block  grant

mechanism  itself.  For  example,  savings could  be  greatly  decreased  or increased  by

choosing  a higher  or lower  base  amount  for the  start-up  year.  Or, some  factor  other

than  inflation  could  be  used  to annually  increase  the  appropriation.  In fact,  those  factors

could be  used  to increase  the  amount  available  to States  for administrative  costs.  The

key here  is that  the  block  grant  mechanism  allows policy makers  to decide  how much

they want  to spend  for administration  and  to efficiently  distribute  the  funds  to the  States.

~parity  This  option  does  not  address  any funding  disparities  that  may  currently  exist

among  the  States  since  it freezes  their  administrative  funding  at the  FY  1993 level.  Some

low cost States  may be  operating  programs  below  desired  staffing  levels because  of

current  budget  constraints,  but  plan  to hire  more  staff to better  administer  their

programs.  Alternatively,  this approach  does  nothing  to limit  Federal  reimbursement  to

States  that  may be  operating  excessively costly programs,  in essence,  rewarding  them  by

locking  in higher  levels  of funding.

Predictability  A block  grant  option  would  greatly  enhance  predictability  since  the  annual

increase  would  grow at  the  rate  of inflation.

OPTION  3:  SMNDARD  COST PER RECIPIENT 
Option  3 funds  each  States  administrative  costs on the  basis  of a standardized  cost per 
recipient  (CPR).  Though  there  are  numerous  ways to calculate  a standard  cost  per 
recipien~  ours  is based  on the  average  cost per  recipient  for FY  1989-FY  1993 (see 
Table  5). 
Specifically,  we calculated  the  overall  State  average  of the  cost  per  recipient  for each 
year  from  FYs  1989-1993.  This  average  cost  per  recipient  served  as the  standard  cost 
per  recipient  for the  baseline  year  of FY  1993.  It was increased  by inflation  in 
subsequent  years.  It was also adjusted  to compensate  for differences  in labor  costs 
13  >>>  TABLE  5  <<< 
STANDARDIZED  COST  PER  RECIPIENT 
1995  1996  1997  1998  1999 
---------------------------- ---------------------------- ,.------------- -.----------- --------------------------- .  ---------------------------
Ver 1  Ver 2  Ver 3  Ver  1  Ver 2  Ver 3  Ver  1  Ver 2  Ver 3  Ver 1  Ver 2  Ver 3  Ver  1  Ver 2  Ver 3 
---------------------- ......  ---------------------------- ,----------------------..  --- --------------------------- .  ---------------------------
Standard  Cost 
Per  Recipient  $168.35  $168.35  $168.35  $173.73  S173.73  S173.73  S179.29  S179.29  S179.29  S185.03  S185.03  S185.03  S190.95  S190.95  $190.95 
Recipients 
(in  millions)  46.3  42.7  39.5  50.3  44.5  39.5  54.8  46.3  39.5  59.9  48.3  39.5  65.7  50.5  39.5 
(s166) 
Estimated  Savings  ($943  )  (s339)  S171  (S1,269)  (S259)  S557  (S1 ,671)  S996  (s2,166)  (S56)  S1,496  (S2,779)  S72  S2 ,063 
(S  in  millions) 
NOTES: 
Version  1  uses  estimates  of  recipients  based  on  the  increase  over  the  pest  5  years 
Version  2  uses  estimates  of  recipients  based  on  the  increase  over  the  &st  Ilyears. 
Version  3  holds  the  ntmber  of  recipients  constant  at  the  FV  1993  level.  between  states.  We  used  the  Bureau  of Labor  Statistics  listing of State  wage  levels for 
government  employees  to adjust  the  standard  cost per  recipient  for these  differences. 
Our  cost per  recipient  figure  uses an estimated,  unduplicated  count  of the  number  of 
recipients  for all three  programs.  Unfortunately,  none  of the  three  agencies  currently 
collects  unduplicated  recipient  information.  Therefore  we estimated  it using information 
from  the  Sumev  of Income  and  Program  Participation,  which  is administered  by the 
Bureau  of the  Census.8  If adopted,  this option  would  require  that  States  report  their 
unduplicated  count  of recipients:  As a result,  current  data  systems  may need  to be 
improved.  However,  other  per  recipient  approaches  may not  require  an unduplicated 
count. 
To  illustrate  the  sensitivity  of these  calculations,  we varied  our  method  for projecting 
future  numbers  of recipients.  As shown  on Table  5, we calculated  three  different 
recipient  projections;  one  was based  on the  historical  increase  over  the  past  5 years, 
another  was based  on the  historical  increase  from  the  past  11 years,  and  the  third  holds 
recipients  constant  at the  1993 level.  The  cost per  recipient  remained  constant  in each 
version  of this option. 
We  adjusted  for savings already  realized  by the  AFDC  and  Food  Stamp  programs  by the 
reduction  in special  matching  rates  by subtracting  the  estimated  savings amount  from 
total  administrative  costs. 
lE!Pf@ 
Adequacy  States  that  have  a cost per  recipient  level higher  than  the  standard  amount 
will experience  a reduction  in Federal  funding  compared  to their  current  baseline 
amount.  This  could  be  a real  disadvantage  if their  current  higher  funding  is the  result  of 
unique  cost problems  not  experienced  by other  States  who spend  less per  recipient. 
Though  we used  a historical  baseline,  policy makers  could  select  a standard  amount  and 
growth  rates  based  on many  different  factors  to ensure  adequate  funding  for States.  One 
advantage  is that  policy makers  can be very explicit  about  the  types  of activities  they  are 
including  in the  rate  and  the  level of funding  that  will be  provided  for these  activities.  In 
addition,  a standard  rate  may generate  incentives  for greater  efilciency  among  the  States. 
I?lexiiility  and  Administrative  Reliefi  Like  the  block  grant  option,  a standard  cost  per 
recipient  approach  gives States  the  responsibility  for, and  control  of, their  administrative 
funds.  A standard  cost per  recipient  approach  would  relieve  much  of the  administrative 
burden  on States  since  they would  no longer  have  to maintain  their  cost  allocation 
processes  for these  three  programs.  This  approach  has an advantage  over  the  block 
grant  (Option  2) since  it automatically  adjusts  according  to the  number  of recipients. 
Costx  Based  on the  number  of recipients,  this options  would  either  cost  or save Federal 
funds.  The  three  versions  of this option  produced  dramatically  different  results  in terms 
of estimated  savings.  Version  1 us&  recipient  estimates  based  on the  recipient  increase 
over  the  past  5 years,  it results  in an increased  cost  to the  Federal  Government  of $8.8 
14  billion  between  FY  1995 and  FY  1999.  Version  2 uses recipient  estimates  based  on the 
recipient  increase  over  the  past  11 years,  it results  in an  increased  cost  to the  Federal 
Government  of $748 million  between  FY  1995 and  FY  1999.  Version  3 holds  the 
number  of recipients  constant  at the  FY  1993 level and  results  in a savings to the  Federal 
Government  of $5.1 billion  between  FY  1995 and  FY  1999.  It is clear  from  these  figures 
that  it is critical  to consider  the  sensitivity  of the  data  to the  underlying  assumptions  when 
assessing  each  of the  options. 
Disparity  This  option  directly  addresses  the  funding  disparity  among  States  because  all 
States  receive  the  same  amount  of funding  per  recipient.  For  example,  the  actual  cost 
for New Jersey  in FY  1993 was $227 per  recipient,  versus  $99 for Florida.  Under  a 
standard  cost per  recipient  approach,  New Jersey  and  Florida  would  receive  the  same, 
standard  per  recipient  amount  with adjustments  for differences  in labor  costs. 
Predictability  Like  the  block  grant  option,  this approach  would  greatly  enhance  the 
ability to plan  and  budget  for administrative  costs prospectively. 
OPTION  4  CAP 
Option  4 imposes  a cap  on  the  Federal  reimbursement  of the  cost  per  recipient.  Each 
year,  States  would  be  reimbursed  up  to  a percentage  above  the  median  cost  per  recipient 
for all States  (see  Tables  6 and  7). 
Based  on our  analysis  of administrative  growth  under  the  current  system,  we first 
determined  the  amual  cost  per  recipient  for each  State.  Then  we determined  the 
annual  median  cost per  recipient  to calculate  the  cap  amount.  Next,  the  cap  was applied 
to individual  State  costs per  recipient.  To  illustrate  the  impact  that  different  cap  levels 
might  have  on States,  we considered  two cap  levels:  150 percent  of the  national  median, 
and  125 percent  of the  national  median.  Under  this approach,  States  that  have 
administrative  costs in excess of the  cap  would  receive  only the  cap  amount.  States  that 
have  a cost  per  recipient  below  the  cap  would  receive  their  actual  cost. 
We adjusted  for savings already  realized  by the  AFDC  and  Food  Stamp  programs  by the 
reduction  in special  matching  rates  by subtracting  the  estimated  savings  amount  from 
total  administrative  costs. 
Im12a!a

Adequaw  This  funding  approach  the  highest  cost States  since  their 
would  Impact 
administrative  costs would  not  be fully covered.  With  a  150 percent  cap,  we estimate 
that  7 States  would  be  affected  in FY  1999.  With  a  125 percent  cap,  21 States  would  be 
affected  in FY  1999.  The  number  of States  affected  by a cap vary in any given year. 
Compared  to the  previous  option,  this one  offers  more  of a compromise  between  the 
need  to reduce  disparity  of funding  among  the  States  while still allowing  for legitimate 
differences.  It allows for some  variation  but  not for extensive  differences. 
15
 >>>  TABLE  6  <<< 
15W  COST  PER  RECIPIENT  CAP 
(CPR  in  dollars,  A&I  in  thousands) 
----------------------------- .  ----------------------------------------------------------------------------------------------------------------------
1995  150%  1995  1996  150%  1996  1997  150%  1W7  19%  150%  1998  1999  15UX  1999 
CPR  CPR  CAP  Ackn  CPR  CPR  CAP  Adm  CPR  CPR  CAP  Acin  CPR  CPR  CAP  Acin  CPR  CPR  CAP  Adm 
------ ------ ------ ------ ------ .----- ------ ------ ------ ------ ------ ------ ------ ------ ------
Alabama  95.94  $95.94  $71,078  96.30  $96.30  $76,329  96.66  $96.66  $81,968  97.03  $97.03  $88,024  97.39  $.97.39  $94,527 
A(aska  323.01  218.25  21,254  326.85  216.04  23,718  330.74  219.98  27,226  334.67  227.45  31,735  338.65  230.54  36,262 
Arizona  126.73  126.73  125,179  112.61  112.61  145,485  100.05  100.05  169,087  88.90  88.90  196,517  78.99  78.W  228,396 
Arkansas  118.26  118.26  48,968  120.93  120.93  53,011  123.67  123.67  57,388  126.48  126.48  62,126  129.34  129.34  67,256 
California  181.67  181.67  ,735,574  187.30  187.30  ,261,276  193.10  193.10  1,400,891  199.08  IW.08  1,555,961  205.25  205.25  1,728,197 
Co 1orado  120.78  120.78  49,817  119.05  119.05  52,660  117.33  117.33  55,666  115.64  115.64  58,843  113.98  113.98  62,202 
Connect  i cut  145.50  145.50  67,241  136.03  136.03  69,637  127.18  127.18  72,118  118.90  118.90  74,688  111.16  111.16  77,350 
Delaware  201.10  201.10  20,929  204.32  204.32  23,972  207.59  207.59  27,458  210.91  210.91  31,451  214.29  214.29  36,024 
Dist.  of  Col.  251.57  218.25  35,600  250.56  216.04  37,381  249.55  219.98  40,377  248.55  227.45  44,286  247.55  230.54  47,617 
Florida  85.41  85.41  250,760  79.35  79.35  276,249  73.72  73.72  304,330  68.49  68.49  335,265  63.62  63.62  369,345 
Georgia  113.57  113.57  161,838  109.93  109.93  174,742  106.41  106.41  188,676  103.00  103.00  203,720  W.70  W.70  219,963 
Haua i i  157.63  157.63  24,798  156.63  156.63  25,895  155.65  155.65  27,040  154.66  154.66  28,236  153.69  153.69  29,484 
Idaho  206.19  206.19  26.473  210.21  210.21  29,696  214.30  214.30  33,312  218.47  218.47  37,368  222.73  222.73  41,918 
ILlinois  139.33  139.33  258;  668  144.00  144.00  276,958  148.84  148.84  296,540  153.83  153.83  317,508  158.99  158.W  339,957 
Indiana  101.06  101.06  84,405  99.18  99.18  92,184  97.33  97.33  100,680  95.52  95.52  109,959  93.74  93.74  120,094 
1 ona  133.79  133.79  43,992  136.98  136.98  46,329  140.25  140.25  48,791  143.60  143.60  51,383  147.02  147.02  54,113 
Kansas  140.07  140.07  44.646  140.08  140.08  48,050  140.10  140.10  51,713  140.11  140.11  55,656  140.12  140.12  59,900 
Kent  ucky  117.89  117.89  96;  062  121.61  121.61  104,849  125.44  125.44  114,441  129.39  129.39  124,911  133.47  133.47  136,338 
Louisiana  91.43  91.43  95,074  95.38  95.38  103,757  99.49  W.49  113,232  103.79  103.79  123,573  108.27  108.27  134,858 
Maine  126.01  126.01  29,204  125.04  125.04  31,303  124.08  124.08  33,554  123.13  123.13  35,966  122.18  122.18  38,551 
Mary  1and  223.12  218.25  138,261  233.14  216.04  146,696  243.61  219.98  160,106  254.56  227.45  177,439  265.99  230.54  192,773 
Massachusetts  131.63  131.63  122,600  122.41  122.41  122,072  113.84  113.84  121,546  105.87  105.87  121,023  98.46  98.46  120,501 
Michigan  181.08  181.08  287,273  189.42  189.42  306,271  198.15  198.15  326,525  207.28  207.28  348,119  216.84  216.84  371,141 
Minnesota  277.05  218.25  119.069  298.33  216.04  123,Z$9  321.26  219.98  132,277  345.94  227.45  143,588  372.52  230.54  152,795 
Mississippi  68.90  68.90  47;117  70.27  70.27  49,559  71.66  71.66  52,128  73.09  73.09  54,829  74.54  74.54  57,671 
Missouri  96.45  96.45  87,991  96.07  96.07  95,119  95.69  95.69  102,825  95.31  95.31  111,155  94.93  94.93  120,160 
Mont ana  187.44  187.44  20,695  196.85  196.85  22.525  206.74  206.74  24,517  217.12  217.12  26,684  228.02  228.02  29,044 
Nebraska  157.44  157.44  30,617  159.90  159.90  32;976  162.40  162.40  35,516  164.94  164.94  38,253  167.52  167.52  41,200 
Nevada  157.34  157.34  25,755  151.90  151.90  29,660  146.65  146.65  34,158  141.58  141.58  39,337  136.69  136.69  45,302 
New  Hanqxhi  re  136.29  136.29  188342  120.47  120.47  19,863  106.49  106.49  21,510  94.13  94.13  23,294  83.20  83.20  25,226 
Neu  Jersey  225.04  218.25  221.344  224.13  216.04  234,287  223.23  219.98  255,093  222.33  222.33  275,681  221.43  221.43  293,595 
New  Mexico  87.19  87.19  34;  367  81.49  81.49  36,377  76.16  76.16  38,506  71.18  71.18  40,759  66.52  66.52  43,143 
Neu  York  230.81  218.25  758,923  229.85  216.04  786,614  228.89  219.98  838,676  227.93  227.45  907,  Wo  226.98  226.98  948,782 
North  Carolina  106.49  106.49  135.230  102.34  102.34  147.498  98.35  98.35  160,878  94.52  94.52  175,473  90.83  90.83  191,391 
North  Dakota  175.02  175.02  13:468  172.23  172.23  14;065  169.49  169.49  14,688  166.80  166.80  15,339  164.15  164.15  16,019 
Ohio  127.97  127.97  256,455  136.46  136.46  285,094  145.51  145.51  316,931  155.16  155.16  352,323  165.46  165.46  391,668 
Oklahoma  187.54  187.54  102,953  190.56  190.56  112,551  193.64  193.64  123,044  196.77  196.77  134,515  IW.94  199.94  147,056 
Oregon  219.10  218.25  98,897  219.09  216.04  106,250  219.08  219.08  116,941  219.07  219.07  126,913  219.06  219.06  137,736 
Pennsylvania  171.47  171.47  292,963  177.74  177.74  313,914  184.24  184.24  336,363  190.99  190.99  360,417  197.97  197.97  386,192 
Rhode  Island  85.98  85.98  19,920  79.40  79.40  20,703  73.32  73.32  21,517  67.71  67.71  22,363  62.53  62.53  23,242 
South  Carol  ina  117.73  117.73  75.643  113.32  113.32  79.717  109.07  109.07  84,010  104.98  104.98  88,534  101.05  101.05  93,302 
South  Oakota  139.28  139.28  11;962  143.28  143.28  12;979  147.40  147.40  14,083  151.63  151.63  15,281  155.98  155.98  16,581 
Tennessee  85.11  85.11  111,870  84.05  84.05  123,207  82.99  82.99  135,694  81.95  81.95  149,447  80.93  80.93  164,593 
Texas  102.72  102.72  401,196  101.41  101.41  448.519  100.13  100.13  501,424  98.85  98.85  560,569  97.59  97.59  626,691 
Utah  205.97  205.97  42;989  207.38  207.38  47;050  208.80  208.80  51,494  210.23  210.23  56,358  211.67  211.67  61,682 
Vermont  210.62  210.62  22,496  212.90  212.90  24,973  215.20  215.20  27,723  217.52  217.52  30,776  219.87  219.87  34,165 
Virginia  149.70  149.70  126,428  147.15  147.15  137,318  144.63  144.63  749,147  142.16  142.16  161,994  139.74  139.74  175,948 
Washington  222.30  218.25  189,322  237.37  216.04  203,803  253.45  219.98  2::,  :g  270.63  227.45  253,758  288.97  230.54  279,711 
Uest  Virginia  72.39  72.39  33,917  74.84  74.84  37,133  77.38  77.38  80.00  80.00  44,506  82.72  82.72  48,725 
Ui sconsi  n  174.71  174.71  99,213  186.95  786.95  107,482  200.05  200.05  116;441  214.06  214.06  126,147  229.05  229.05  136,661 
Uyomi ng  197.13  197.13  12,595  202.09  202.09  14,268  207.17  207.17  16,163  212.38  212.38  18,309  217.73  217.73  20,741 
Guam  397.78  218.25  2:222  466.53  216.04  2.268  547.16  219.98  2,382  641.73  227.45  2,539  752.65  230.54  2,654 
Puerto  Rico  26.75  26.75  11;469  27.61  27.61  10;938  28.50  28.50  10,431  29.41  29.41  9,948  30.36  30.36  9,487 
Virgin  islands  258.81  218.25  3,633  286.13  216.04  3,550  316.34  219.98  3,569  349.74  227.45  3,642  386.66  230.54  3,644 
10TAL  S158.73  $150.47  $6,668,757  S161  .40  S150.07  $7,212,524 $164.60  $151.00  $7,857,125  $168.36  $152.55  $8,584,479  $172.75  $153.51  $9,331,573 
Special  Match  ,ings  (80,000)  (90,000) (90,000)  (90,000)  (90,000) 
ADJ  TOTAL  $6,588,757  $7,122,524  $7,767,125  $8,494,479  $9,241,573  >>>  TABLE  7  <<< 
125%  COST  PER  RECIPIENT  CAP 
(CPR  in  dol(ars,  Ah  in  thousands) 
. --------------------------------- -------- -------- -----------------------------------------------------------------------------------------------------
1995  125%  1995  1996  125%  1996  1997  125%  1997  1998  125%  1998  1999  125%  1999 
CPR  CPR  CAP  Ackn  CPR  CPR  CAP  Adm  CPR  CPR  CAP  Ah  CPR  CPR  CAP  Acin  CPR  CPR  CAP  Adm 
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
A 1abama  95.94  $95.94  $71,078  96.30  $96.30  $76,329  96.66  $96.66  $81,968  97.03  $97.03  $.88,024  97.39  $97.39  $94,527 
Alaska  323.01  181.88  17,713  326.85  180.00  19,762  330.74  183.31  22,688  334.67  189.54  26,446  338.65  192.11  30,217 
Arizona  126.73  126.  Z3  125,179  112.61  112.61  145,485  100.05  100.05  169,087  88.90  88.90  196,517  78.99  78.99  228,396 
Arkansas  118.26  118.26  48,968  t20.93  120.93  53,011  123.67  123.67  57,388  126.48  126.48  62,126  129.34  129.34  67,256 
California  181.67  181.67  1,135,574  187.30  180.00  1,212,143  193.10  183.31  1,329,865  199.08  189.54  1,481,366  205.25  192.11  1,617,526 
Colorado  120.78  120.78  49,817  119.05  119.05  52,660  117.33  117.33  55,666  115.64  115.64  58,843  113.98  113.98  62,202 
Connect  i cut  145.50  145.50  67,241  136.03  136.03  69,637  127.18  127.18  72,118  118.90  118.90  74,688  111.16  111.16  77,350 
Delaiiare  201.10  181.88  18,928  204.32  180.00  21,119  207.59  183.31  24,246  210.91  189.54  28,264  214.29  192.11  32,296 
Dist.  of  Col.  251.57  181.88  29,667  250.56  180.00  31,145  249.55  183.31  33,646  248.55  189.54  36,905  247.55  192.11  39,679 
Florida  85.41  85.41  250,760  79.35  79.35  276,249  73.72  73.72  304,330  68.49  68.49  335,265  63.62  63.62  3698345 
Georgia  113.57  113.57  161,838  109.93  109.93  174,742  106.41  106.41  188,676  103.00  103.00  203,720  99.70  99.70  219,963 
Hanai  i  157.63  157.63  24,798  156.63  156.63  25,895  155.65  155.65  27,040  154.66  154.66  28,236  153.69  153.69  29,484 
Idaho  206.19  181.88  23,352  210.21  180.00  25,429  214.30  183.31  28,495  218.47  189.54  32,419  222.73  192.11  36,156 
Illinois  139.33  139.33  258,668  144.00  144.00  276,958  148.84  148.84  296,540  153.83  153.83  317,508  158.99  158.99  339,957 
Indiana  101.06  101.06  84,405  99.18  99.18  92,184  97.33  97.33  100,680  95.52  95.52  109,959  93.74  93.74  120,  D94 
1owa  133.79  133.79  43,992  136.98  136.98  46,329  140.25  140.25  48,791  143.60  143.60  51,383  147.02  147.02  54,113 
Kansas  140.07  140.07  44,646  140.08  140.08  48,050  140.10  140.10  51,713  140.11  140.11  55,656  140.12  140.12  59,900 
Kentucky  117.89  117.89  96,062  121.61  121.61  104,849  125.44  125.44  114,441  129.39  129.39  124,911  133.47  133.47  136,338 
Louisiana  91.43  91.43  95,074  95.38  95.38  103,757  99.49  99.49  113,232  103.79  103.79  123,5i3  108.27  108.27  134,858 
Maine  126.01  126.01  29,204  125.04  125.04  31,303  124.08  124.08  33,554  123.13  123.13  35,966  122.18  122.18  38,551 
Maryland  223.12  181.88  115,221  233.14  180.00  122,224  243.61  183.31  133,417  254.56  189.54  147,864  265.99  192.11  160,639 
Massachusetts  131.63  131.63  122,600  122.41  122.41  122,072  113.84  113.84  121,546  105.87  105.87  121,023  98.46  98.46  120,501 
Michigan  181.08  181.08  287,273  189.42  180.00  291,037  198.15  183.31  302,069  207.28  189.54  318,321  216.84  192.11  328,821 
Minnesota  277.05  181.88  99,227  298.33  180.00  103,097  321.26  183.31  110,227  345.94  189.54  119,656  372.52  192.1I  127,324 
Mississippi  68.90  68.90  47,117  70.27  70.27  49,559  71.66  71.66  52,128  n.09  73.09  54,829  74.54  74.54  57,671 
Missouri  96.45  96.45  87,991  96.07  96.07  95,119  95.69  95.69  102,825  95.31  95.31  111,155  94.93  94.93  120,160 
Mont ana  187.44  181.88  20,082  196.85  180.00  20,597  206.74  183.31  21,  ~8  217.12  189.54  23,295  228.02  192.11  24,469 
Nebraska  157.44  157.44  30,617  159.90  159.90  32,976  162.40  162.40  35,516  164.94  164.94  38,253  167.52  167.52  41,200 
Nevada  157.34  157.34  25,755  151.90  151.90  29,660  146.65  146.65  34,158  141.58  141.58  39,337  136.69  136.69  45,302 
New  Hanpshire  136.29  136.29  18,342  120.47  120.47  79,863  106.49  106.49  21,510  94.13  94.13  23,294  83.20  83.20  25,226 
New  Jersey  225.04  181.88  184,459  224.13  180.00  195,203  223.23  183.31  212,570  222.33  189.54  235,026  221.43  192.11  254,722 
New  Mexico  87.19  87.19  34,367  81.49  81.49  36,377  76.16  76.16  38,506  71.18  71.18  40,759  66.52  66.52  43,143 
New  York  230.81  181.88  632,453  229.85  180.00  655,390  228.89  183.31  698,872  227.93  189.54  756,652  226.98  192.11  803,025 
North  Carolina  106.49  106.49  135,230  102.34  102.34  147,498  98.35  98.35  160,878  94.52  94.52  175,473  90.83  90.83  191,391 
North  Dakota  175.02  175.02  13,468  172.23  172.23  14,065  169.49  169.49  14,688  166.80  166.80  15,339  164.15  164.15  16,019 
Ohio  127.97  127.97  256,455  136.46  136.46  285,094  145.51  145.51  316,931  155.16  155.16  352,323  165.46  165.46  391,668 
Oklahoma  187.54  181.88  99,848  190.56  180.00  106,3?2  193.64  183.31  116,480  196.77  189.54  129,576  199.94  192.11  ; ::,  ;;; 
Oregon  219.10  181.88  82,417  219.09  180.00  88,526  :;.  l))  183.31  97,847  219.07  189.54  109,807  219.06  192.11 
Pennsylvania  171.47  171.47  292,963  177.74  177.74  313,914  183.31  334,657  190.99  189.54  357,689  197.97  192.11  374;  754 
Rhode  Island  85.98  85.98  19,920  79.40  79.40  20,703  73;32  73.32  21,517  67.71  67.71  22,363  62.53  62.53  23,242 
South  CaroLina  117.73  117.73  75,643  113.32  113.32  79,717  109.07  109.07  84,010  104.98  104.98  88,534  101.05  101.05  93,302 
South  Oakota  139.28  139.28  11,962  143.28  143.28  12,979  147.40  147.40  14,083  151.63  151.63  15,281  155.98  155.98  16,581 
Tennessee  85.11  85.11  111,870  84.05  84.05  123,207  82.99  82.99  135,694  81.95  81.95  149,447  80.93  80.93  164,593 
Texas  102.72  102.72  401,196  101.41  101.41  448,519  100.13  100.13  501,424  98.85  98.85  560,569  97.59  97.59  626,691 
Utah  205.97  181.88  37,961  207.38  180.00  40,838  208.80  183.31  45,208  210.23  189.54  50,813  211.67  192.11  55,983 
Vermont  210.62  181.88  19,426  212.90  180.00  21,114  ;;:  .::  183.31  23,615  217.52  189.54  26,817  219.87  192.11  29,852 
Virginia  149.70  149.70  126,428  147.15  147.15  137,318  144.63  749,147  142.16  142.16  161,994  139.74  139.74  175,948 
Wash i ngton  222.30  181.88  157,773  237.37  180.00  169,805  253:45  183.31  Ig,;;;  270.63  189.54  211,463  288.97  192.11  233,084 
Uest  Virginia  72.39  72.39  33,917  74.84  74.84  37,133  77,38  77.38  80.00  80.00  44,506  82.72  82.72  48,725 
Uisconsin  174.71  174.71  99,213  186.95  180.00  103,486  200.05  183.31  106:699  214.06  189.54  111,697  229.05  192.11  1;;,;;; 
Uyomi ng  197.13  181.88  11,621  202.09  180.00  12,708  207.17  183.31  14,301  212.38  189.54  16,340  217.73  192.11 
Guam  397.78  181.88  1,852  466.53  180.00  1,890  547.16  183.31  1,985  641.73  189.54  2,116  752.65  192.11  2:212 
Puerto  Rico  26.75  26.75  11,469  27.61  27.61  10,938  28.50  28.50  10,431  29.41  29.41  9,948  30.36  30.36  9,487 
Virgin  Islands  258.81  181.88  3,028  286.13  180.00  2,958  316.34  183.31  2 #974  349.74  189.54  3,035  386.66  192.11  3,037 
TOTAL  %158.73  $141.46$6,386,125  $161.40  $139.92  %,838,934  $164.60  $140.28$7,420,527  $168.36  $141.89$8,116,367  $172.75  $142.21  $8,791,989 
Speciat  Match  s  ings  (80,000)  (90,000)  (90,000;  (90,000:  (90,000) 
ADJ  TOTAL  $6,306,125  %,  748,934  $7,330,527  $8,026,367  $8,701,989  Flexibility  and Administrative  Reliefi  Unlike  the  other  options,  this alternative  would  not

reduce  the  administrative  burden  currently  experienced  by States  and  the  Federal

Government.  Though  they would  not  have  to allocate  costs between  the  AFDC,  Food

Stamp  and  Medicaid  programs,  States  would  continue  to meet  current  reporting

requirements.

Costs  Based  on historical  data  through  FY  1993, we project  that  a cap  on

reimbursement  at  150 percent  of the  national  median  would  reduce  the  Federal  share  of

administrative  funding  by $839 million  from  FYs  1995-1999.  Using  the  125 percent  cap,

the  Federal  share  of administrative  funding  would  be reduced  by $2.9 billion  from  FYs

1995-1999.  A cap  approach  only controls  the  growth  at  the  margin  based  on those  States

that  exceed  the  cap.  As States  continue  to report  increases  in administrative  costs, the

national  median  and  therefore,  the  Federal  cap would  increase  correspondingly.

Disparity  This  option  would  reduce  some  of the  funding  disparity  that  exists between

States.  States  with  the  highest  cost would  see  their  cost per  recipient  levels  reduced,

closing  the  funding  gap  somewhat.

Predictability  This option  would  not  improve  predictability  in the  system.  The  system

would  still be  dependent  on the  cost allocation  plans  submitted  by the  States.

OPTION  5: FIAT  PERCENT 
The  final  option  reimburses  each  State  on the  basis  of its ratio  of administrative  cost to 
total  program  cost  (see  Table  8). 
Specifically,  we calculated  the  FY  1993 ratio  of administrative  cost to total  program  cost 
for each  State.  We  then  applied  that  ratio  (or percentage)  to an estimated  benefit 
payment  in subsequent  years.  (AFDC,  Medicaid  and  Food  Stamp  benefit  payments 
combined  increased  by 17.8 percent  annually.)  For  example,  Alabamas  ratio  of 
administrative  cost to total  program  cost is 3.6 percent  in FY  1993.  The  estimated  total 
benefit  payment  for Alabama  is $2.5 billion  in FY  1995.  To  calculate  Alabamas  FY 
1995 Federal  share  of administrative  costs, we applied  the  3.6 percent  to benefit 
payments.  This  resulted  in an expenditure  of $91.6 million  in administrative  costs for the 
Federal  Government  to Alabama. 
We  adjusted  for savings already  realized  by the  AFDC  and  Food  Stamp  programs  by the 
reduction  in special  matching  rates  by subtracting  the  estimated  savings amount  from 
total  administrative  costs. 
16
 >>>  TABLE  8  <<c 
FLAT  PERCENTAGE 
($  in  thousands) 
. ---------- ------- -------------------------------------------------------------------
FY  1993  FY  1994  FY  1995  FY  1996  FY  1997  FY  1998  FY  1999 
A&/Tot  Ah  Adn  Adm  Adm  Ackn  Ah 
--------------------------------------------- ----------------------------
AI abama  3.6%!  $-7-5,141  $9--1,608-- $111,683  $136,157  $165,994  $202,370 
Alaska  9.3%  28,796  34,303  40,863  48,678  57,988  69,078 
Arizona  6.2%  125,910  171,069  232,425  315,787  429,047  582,929 
Arkansas  4.1%  48,626  56,591  65,859  76,646  89,200  103,809 
California  1,074,635  1,254,571  1,464,635  1,709,872  I,  W6,171  2,330,408 
Colorado  ::E  53,339  63,815  76,349  91,345  109,287  130,753 
Connect  i cut  4.4%  75,250  90,322  108,412  130,126  156,189  187,472 
Dela~are  8.2%  19,009  22,651  26,991  32,162  38,325  45,668 
Dist.  of  COL.  42,080  48,169  55,139  63,117  72,249  82,703 
Florida  ;:;  260,454  328,316  413,859  521,692  657,620  828,964 
Georgia  5.2%  164,246  194,331  229,928  272,045  321,876  380,835 
Hawaii  5.7%  26,077  29,900  34,283  39,310  45,073  51,680 
Idaho  7.4%  24,553  28,655  33,443  39,030  45,550  53,160 
Illinois  258,188  295,440  338,067  386,844  442,659  506,527 
Indiana  ?:%  84,761  101,531  121,620  145,683  174,506  209.033 
I oua  4.7%  44,279  49,430  55,180  61,598  68,763  76;762 
Kansas  4.6%  47,301  58,049  71,238  87,423  107,287  131,663 
Kentucky  4.3%  93,683  108,844  126,459  146,924  170,701  198,327 
Louisiana  2.2%  100,024  125,330  157,038  196,768  246,550  308,926 
Maine  3.7%  29,818  34,978  41,033  48,134  56,466  66,239 
Haryl  and  7.6%  129,669  149,221  171,722  197,615  227,412  261,703 
Massachusetts  4.5%  141,831  162,667  186,565  213,973  245,407  281.460 
Michigan  6.4%  281,616  313,791  349,642  389,590  434,102  483;  699 
Minnesota  7.3%  132,215  147,817  165,260  184,761  206,563  230,938 
Mississippi  3.0%  48,742  55,785  63,845  73,070  83,628  95.712 
Missouri  3.8%  92,344  113,250  138,889  170,332  208,894  256;  186 
Montana  5.4%  19,953  22,789  26,028  29,727  33,952  38,778 
Nebraska  5.6%  30,606  35,492  41,158  47,727  55,346  64,181 
Nevada  6.2%  25,584  33,706  44,405  58.502  77,073  101.540 
New  Hampshire  5.5%  21 #933  30,758  43,134  60;  489  84,827  118;958 
Neti  Jersey  6.3%  241,409  289,610  347,434  416,804  500,024  599,860 
Neu  Mexico  4.3%  36,5~  43,608  51,997  62,000  73,927  88,148 
Neii  York  5.4%  850,164  979,117  1,127,628  1,298,666  1,495,647  1,722,506 
North  CaroLina  4.3%  137,614  166,600  201,690  244,1Zf  295,603  357,865 
North  Dakota  5.0%  13,886  15,615  17,558  19,744  22,201  24,964 
Ohio  4.3%  234,633  265,290  299,953  339.144  383,456  433.559 
Oklahoma  7.3%  98,365  112,321  128,258  146;456  167,236  190;965 
Oregon  8.8%  98,359  114,771  133,920  156,264  182,337  212,760 
Pennsylvania  5.1%  297,308  346,414  403,630  470,297  547,975  638.482 
Rhode  Island  3.2%  21,751  25,654  30,258  35,687  42,091  49;  644 
South  Carolina  4.4%  83,752  102,989  126,643  155,Z51  191,499  235,482 
South  Dakota  4.1%  11,483  12,978  14,668  16,578  18,  i37  2~8176 
Tennessee  3.6%  109,662  130,392  155,041  184.349  219,197  260.633 
Texas  4.5%  403,683  507,660  638,419  802;  857  1,009,650  1, 269;  707 
Utah  7.0%  41,862  48,829  56,955  66 #434  77,490  90 #386 
Vermont  7.8%  21,070  24,320  28,071  32,402  37,400  43,169 
Virginia  7.4%  125,098  146,026  170,455  198,970  232,256  271,110 
Washington  7.3%  168,135  197,670  232,393  273,216  321,211  377,636 
Uest  Virginia  2.2%  34,524  42,121  51,388  62,695  76,490  93,320 
Uisconsin  4.8%  92,555  101,337  110,953  121,481  133,009  145,630 
~:i  ng  7.2%  11,839  14,281  17,226  20,778  25,063  30,232 
10.3%  3,057  3,375  3,726  4,114  4,542  5,015 
Puerto  Rico
 9.6%  12,919  13,235  13,559  13,891  14,231  14,580 
Virgin  Islands
 15.1%  3,832  4,059  4,300  4,555  4,826  5,112 
TOTAL
 5.8%  .$6,754,198  $7,961,449  $9,401,275  $11,122,414  .S13,184,803  $15,662,402 
Sp  Match  Savings
 ($90,000)  ($90,000)  ($90,000)  ($90,000)  ($90,000)  ($90,000) 
AOJ  TOTAL
 $6,664,198$7,871,449  $9,311,275  $11,032,414  $13,094,803$15,572,402  E?U-
Adequaq  States  would  have  little  incentive  to reduce  administrative  costs under  this 
option,  since  administrative  reimbursement  would  be  tied  to benefit  payments  rather  than 
the  actual  cost of administering  these  programs.  States  most  at risk under  this option  are 
those  with a relatively  low ratio  of administrative  costs to benefit  payments.  States  with a 
lower  percent  would  be  held  to this level.  This  outcome  is similar  to the  block  grant 
option  which  freezes  States  at their  FY  1993 funding  levels, then  increases  in subsequent 
years  for inflation  only. 
Flexibility  and  Administrative  Relief  Like  many  of the  other  options,  this option  would 
simpli&  the  system  for funding  administrative  costs for the  States  and  the  Federal 
Government.  States  could  eliminate  or modify their  burdensome  cost allocation  system 
and  increase  their  flexibility in the  use of these  funds. 
Costs  This  option  illustrates  that  not  all options  necessarily  result  in cost savings.  In 
fact,  based  on our  assumptions,  there  would  be virtually  no cost control  under  this 
option.  Based  on historical  data  through  FY  1993, we project  that  by FY  1999, the 
Federal  share  would  be $16.8 billion  more  than  it would  be  under  the  current  system.  By 
basing  administrative  funding  as a percentage  of benefit  costs, it allows the  benefit  levels 
to drive  the  allowable  level of administrative  costs.  This  method  even  fails to recognize 
the  fact  that  in recent  years,  as a percent  of total  program  costs, administrative  costs 
have  been  shrinking. 
Disparity  There  would  continue  to be  disparity  among  the  States  since  future 
administrative  funding  will be based  on the  current  ratio  of administrative  costs  to total 
program  costs. 
Predictability  Budgeting  for administrative  costs under  this approach  would  continue  to 
be  done  retrospectively  since  it will be based  on annual  program  costs. 
17
 CONCLUSION 
The  issue  of reforming  the  administrative  cost allocation  system  is very relevant  today 
given the  considerable  interest  in reinventing  Federal  Government  operations.  If action 
is not  taken,  this cost allocation  system will remain  burdensome  to both  the  States  and 
the  Federal  Government.  It will also be  costly and  difficult  to audit.  Therefore,  we 
believe  that  opting  to reform  the  system  is preferable  to an approach  which maintains 
the  status  quo with enhanced  monitoring  capabilities.  We also believe  that  reform  should 
be  implemented  concurrently  with enhanced  efforts  to insure  quality  in the  delivery  of 
services. 
This  study illustrates  several  of many  possible  alternatives  that  seek  to address  the 
fundamental  problems  in the  current  cost allocation  system.  We recognize  that  as a 
result  of implementing  one  of these  options,  States  may not  receive  as much  Federal 
funding  as they  might  under  the  current  system.  However,  significant  benefits  will accrue 
to both  the  States  and  the  Federal  Government  by simpli&ing  the  administrative  cost 
funding  system.  These  benefits  include:  increased  flexibility, reduced  growth  in cost, 
minimized  funding  disparity  among  States,  and  greater  predictability  for Federal 
budgeting  and  planning. 
These  alternative  funding  approaches  are  meant  to serve  as examples  of what  can  be 
done.  Any of the  options  could  be  modified  to moderate  their  impact  on State  budgets 
or to achieve  greater  savings.  They  could  even  be adapted  to increase  Federal  financing 
of administrative  costs should  policy makers  wish to do so.  The  options  would  then 
provide  more  control  and  flexibility in spending. 
We  also believe  that  some  combination  of the  options  might  have  a number  of 
advantages.  For  example,  the  block  grant  alternative  could  be combined  with  the 
standard  cost per  recipient  approach.  Under  this combined  alternative,  States  would 
receive  their  block  grant  amount  as described  under  Option  2 and  an additional  standard 
amount  (see  Option  3) for the  increase  in the  number  of recipients  for  each  year.  By 
combining  these  two options,  States  would  not  have  to absorb  the  increased  cost of 
additional  recipients  since  they would  receive  reimbursement  for them.  In addition, 
States  would  gain greater  discretion  over  the  use of their  administrative  funds.  This 
alternative  would  also decrease  States  administrative  burden  since  they  could  eliminate 
or modi&  their  cost allocation  methodologies  and  reporting  requirements  for these  three 
programs.  Federal  accountability  and  monitoring  concerns  would  also be  addressed. 
Finally,  programs  other  than  the  three  discussed  in this report  could  be  considered  as 
could  different  combinations.  For  example,  administrative  costs for Child  Support 
Enforcement  programs  could  have  been  substituted  for Medicaid  to illustrate  other 
possibilities.  Our  bottom  line  is that  the  system for reimbursing  administrative  costs 
should  be  simplified  and  made  more  controllable,  predictable  and  efficient. 
18
 APPENDIX  A 
Administrative  Costs  and  Recipients,  1989-1993 
A-1  ADMINISTRATIVE  COSTS

1989-1993

(constant  dollars  =  1993 dollars)

1989  1990  1991  1992  1993	 % 
Change 
AFDC

Current  $  $:9;;  $;,~  $1,405  $1,492  $1,517  11.69Z0

Constant  $  ?  ?  1,491  1,537  1,517  -4.2%

Medicaid

Current  $  1,654  2,005  2,155  2,365  2,682  62.2%

Constant  $  1,927  2,216  2,286  2,436  2,682  39.2%

Food  Stamps

Current  $  1,172  1,247  1,349  1,465  1,540  31.4%

Constant  $  1,365  1,378  1,431  1,509  1,540  12.8%

TABLE  2 
TOTAL  RECIPIENTS 
1989-1993 
(in thousands) 
1989  1990  1991  1992  1993  % 
Change 
AFDC  10,934  11,466  12,596  13,625  14,143  29.3% 
Medicaid  23,511  25,255  28,280  31,150  33,432  42.2910 
Food  Stamps  18,764  19,931  22,625  25,403  26,982  43.8% 
A-2
 ADMINISTRATIVE  COST  PER  RECIPIENT 
1987-1993 
(constant  dollars  =  1993 dollars) 
1987  1988  1989  1990  I  1991  1992  1993 
I 
AFDC  $122  $143  $145  $126  $118  $113  $107 
Constant 
Dollars 
, 
I 
Medicaid  73  80  82  88  81  78  80 
Constant

Dollars

Food  Stamps  69  73  73  69  I  63  59  57

Constant

Dollars

TABLE  4 
Correlation  of Percent  Change  in Administrative  Costs 
and  Percent  Change  in Recipients 
1 Correlation  Coefficient 
1987-1988  I .0427 
1988-1989  I .1532 
1989-1990  .2166 
1990-1991  .0656 
1991-1992  .1742 
1992-1993  .2214 
Note:  The  Correlation  Coefficient  (r)  is a measure  of the  association  between  two 
variables,  X and  Y.  A perfect  correlation  of + 1 indicates  that  all possible  values  of X 
and  Y lie on a straight  line with  a positive  slope.  A perfect  negative  correlation,  -1, 
indicates  that  all possible  values  of X and  Y lie on a straight  line with  a negative  slope. 
A correlation  of O means  the  variables  are  uncorrelated. 
A-3
 ~ecalculation  is based  onannual  data  from  all States  and  territories.  The  independent 
variable  (X)  is the  percent  change  in the  number  of recipients  in each  State  or territory 
and  the  dependent  variable  (Y)  is the  corresponding  change  in administrative  cost. 
A-4
 APPENDIX  B 
Agency  Comments  and  OIG  Response 
B-1  RESPONSE  TO AGENCY  COMMENTS 
We  received  comments  on the  draft  report  from  the  Assistant  Secretary  for  Management 
and  Budget,  the  Assistant  Secretary  for Planning  and  Evaluation,  and  the  Asistant 
Secretary  for Children  and  Families.  They  state  that  we have  not  necessarily 
demonstrated  a serious  problem  in this area,  expressed  concerns  about  the  way we 
estimated  future  costs  and  possible  savings, and  pointed  out  that  there  may be valid 
reasons  for some  disparities  in costs among  the  States.  The  ACF  also requested  a fuller 
discussion  of the  pros  and  cons of the  various  funding  alternatives.  The  Health  Care 
Financing  Administration  provided  informal  comments  on early  drafts,  but  did not 
provide  comments  on the  latest  one. 
We  recognize  the  legitimate  concerns  that  have  been  raised  and  have  considered  them 
carefully.  We  have  revised  the  report  in several  places,  primarily  to focus more 
succinctly  on the  need  to change  the  current  system  and  to update  our  savings 
projections  based  on the  latest  available  data. 
At this point  we believe  that  we have  an honest  disagreement  about  the  nature  of this 
problem  and  its appropriate  solution.  Perhaps  this disagreement  stems  from  differences 
in overall  focus. 
The  agency comments  focus  on whether  total  costs within  the  current  system  are  out  of 
control.  There  is some  evidence  offered,  such as recent  declines  in cost  per  recipient 
data  and  a levelling  off of the  rate  of increase  in Federal  costs, that  there  is no real 
problem  here.  We  have  reservations  about  the  significance  of these  indicators  and  we 
address  them  within  the  report  itself.  More  importantly  though,  we think  that  these 
indicators  do not  address  the  most  important  issue. 
We think  that  the  real  issue  is the  current  cost reimbursement  system  itself. The  system 
puts  us at risk because  we have  difficulty knowing  what  we are  paying  for, whether  it is 
cost effective,  and what  we will have  to pay out  in the  future.  It provides  little  incentive 
to economize,  and  is itself  an inefficient  system. 
Agency comments  also caution that  our  proposals  could  harm  some  States  by not  taking 
into  account  their  peculiar  needs.  We  see similar  problems  of inequity  with  the  current 
system. 
Thus,  we continue  to believe  that  the  current  cost reimbursement  system  for welfare 
administrative  costs needs  to be  replaced  for the  following  reasons. 
o	 Under  the  current  system  we are  not  sure  of what  we are  paying  for and 
whether  expenditures  are  cost-effective.  It would  require  a considerable 
investment  in expanded  auditing  and  monitoring  to find out.  These  costs 
would  be  prohibitive  especially  in an environment  of declining  resources. 
Our  Office  of Audit  Services  has reported  that  the  current  cost  allocation 
B-2
 system  results  in mountainous  paperwork,  labyrinthine  accounting  and 
detailed  auditing  and  negotiation  processes. 
o	 We can  not  predict  with any degree  of certainty  under  the  current  system 
what  the  States  are  going to charge  us in the  future.  This  issue  becomes 
very important  in thinking  about  how much  the  Federal  Government  wants 
to pay for administrative  costs under  welfare  reform. 
o	 There  is significant  cost disparity  among  the  States,  without  any clear 
relation  to outcomes.  While  there  are  reasons  offered  for some  disparity, 
there  is no solid evaluated  data  that  rules  out  efficiency  as a factor  in cost 
disparity.  We  also could  find no significant  correlation  between 
administrative  costs and  numbers  of recipients  on an individual  State-by-
State  basis. 
For  these  reasons,  we believe  that  the  current  cost allocation  system  should  be  replaced 
by a system  that  provides  adequate  funding  for States,  incentives  for efficient  operations, 
decreased  Federal  monitoring  and  oversight,  and  predictable  Federal  expenditures.  We 
think  that  the  options  presented  in this report  are  a good  place  to start  in developing  a 
new welfare  administrative  cost system. 
We want  to caution  the  reader  that  the  dollar  estimates  for the  various  options  are 
illustrative  only.  In further  developing  a new administrative  cost system,  it will be 
necessary  to prepare  detailed  estimates  based  on clearly  defined  assumptions,  using the 
most  recent  information  available. 
The  following  are  our  responses  to each  of the  offices  that  we received  comments  from. 
Assistant Secretary for Management  and Budget 
Outvear estbnates  are diiRmmt than Mid-S&n  J!Miinates

There  are,  of course,  numerous  methods  that  could  be  used  to estimate  future

administrative  expenditures.  We  recognize  that  our  estimates  are  higher.  We felt  that

the  best  predictor  of the  future  was actual  past  experience  over  a number  of years,  so we

used  a 5 year  average,  actual  cost by State,  to predict  future  costs.  We  have  now

updated  these  projections  in this final  report  using a 5 year  period  of FY  1989- FY  1993,

the  most  recent  years  for which  reliable  State  data  is available.

LM%rence between adminkm  tive cat  m  wth in the AEDC  and Food Stamn vmgra m.  and

in h  M&aid  urwra m

We realize  that  there  have  been  differences  among  the  three  programs  in their  rates  of

administrative  cost growth.  However,  we believe  that  administrative  cost issues  could  be

addressed  more  effectively  by looking  at a more  global  perspective  rather  than  a narrow

perspective  of individual  programs.  We  know that  at the  State  and  local  level  many  of

the  administrative  functions  and  personnel  are  overlapping  among  these  three  programs.

B-3
 We believe  that  a prospective  administrative  cost system  that  includes  all three  would 
provide  the  greatest  flexibility and  the  most  incentives  for an efficient  operation. 
Rehztionshir)between m  wth in admikrative  costr and casekurd growth 
We  could  find no significant  correlation  between  costs and  workload  on a State-by-State

basis in the  current  cost reimbursed  system.  There  are  a variety  of factors  that

contribute  to administrative  costs.  It is difficult  to ascribe  to any one  factor  precisely  how

much  it affects  the  growth.

. .
LMrxmtv among State-s 
While  there  are  many  reasons  given for the  disparity,  we found  no solid programmatic  or

evaluative  data  that  explained  what  those  reasons  are  and whether  they  are  good

influences  on administrative  costs.  We  also could  find no solid data  that  would  suggest

that  some  States  should  be  spending  more  than  twice what  other  States  spend  per  capita

on administrative  costs.

shDkdiC atkm  of Cost Allocation  Svstems

We  agree  that  the  long range  goal  should  include  even  more  programs  and  that  the

current  cost allocation  system  needs  to be replaced.  We believe  that  the  three  programs

we analyze  in this report  provide  a good  example  of how funding  for many  programs

could  be  combined.

Assistant Secretary for Planning and Evaluation 
Failure to ernriurs&e the &clineir it  adinbdrative  costs per case for welfare 
When  we began  this study, we believed  that  a common  indicator,  such  as cost per 
recipient  would  be  useful  in looking  at the  rate  of growth  of administrative  costs over 
time.  In fact  we used  it in early working  drafts.  However,  as we conducted  further 
analysis,  we could  find no significant  correlation  between  costs and  recipients  on a State-
by-State  basis,  and  thus  do not  believe  that  it is a reliable  indicator  of the  efficient  use of 
administrative  funds  over a given period  of time.  For  example,  we do not  believe  that 
the  recent  decrease  in cost per  recipient  for the  three  programs  is necessarily  indicative 
of more  efficient  State  operations.  It seems  to us to be  much  more  the  result  of recent 
dramatic  increases  in caseload  with States  unable  to increase  administrative  resources 
proportionately. 
In regard  to the  selection  of the  years  for our  analysis, we only had  complete  data  up 
through  1992 when  we prepared  the  official draft  report.  We  agree  that  more  cument 
data  would  be better.  We now have  available  the  1993 data  and  have  included  it in this 
final  report.  We  used  this more  recent  data  instead  of the  earlier  data  to update  all of 
our  estimates.  With  regard  to unit  costs,  the  report  does,  as did the  draft,  indicate  that 
the  time  period  used  could  affect  the  trend  in unit  costs. 
B-4
 l%e retxxtk  estimates  of ROtential savingr are ovem~ated 
We  agree  that  the  most  current  data  should  be  used  in making  any estimates  regarding 
expenditures  or savings.  We  also know that  the  savings are  very sensitive  to assumptions. 
For  that  reason,  it is probably  useful  to look  at savings using different  assumptions  and 
think  about  a range  of numbers  rather  than  an absolute  amount.  However,  as noted  in 
the  previous  paragraph,  we did update  our  estimates  based  on more  recent  data.  Savings 
estimates  have  been  reduced  as a result,  although  they  remain  significant  for most 
options. 
State varihtibn k not bad  w 
We  agree  that  State  variations;n  costs is not  bad  per  se.  However  before  financing  such 
variations  it would  be  useful  to know what  we are  paying  for  and  why there  is variation. 
Because  of the  complexities  in the  accounting  systems  used,  we do not  believe  in the  case 
of administrative  costs that  it is practical  for us to be  able  to know what  we are  paying 
for, what  constitutes  the  variation,  and what  the  outcomes  are  of that  variation. 
Assistant Secretary for Children and Families 
2?ie retxwdtim  not ertabli.rh that there k a maior ~roblern with W  irw of admirdktnrtive 
m 
We believe  that  the  two biggest  problems  with the  current  system  are  a lack  of 
accountability  and  a lack  of cost predictability.  Under  the  current  system,  we are  not 
sure  of what  we are  paying  for and  whether  expenditures  are  cost-effective.  We  also can 
not  predict  with  any degree  of certainty  how much  we are  going to pay in the  future, 
since  States  decide  how much  they  are  going to charge  the  Federal  Government.  We 
also know that  the  current  cost allocation  system  results  in tremendous  paperwork  and 
requires  significant  administrative  oversight.  We believe  that  there  are  other  ways to 
adequately  reimburse  States  for  administrative  costs that  will result  in more  efficient 
operations  at both  the  State  and  Federal  level, and  will provide  predictable  future 
Federal  costs. 
l%e rewti  doer not adkauatelv exulime the reasonr for the dirmuitkr  among the States for 
each of the three Dnnmuns 
We noted  the  disparity  among  the  States  to indicate  that  some  States  require  more  dollar 
inputs,  per  person,  in their  system  than  other  States.  We  found  a lot of anecdotal 
evidence  for this difference  in inputs,  but  could  find no solid  programmatic  or evaluative 
data  to explain  the  need  for the  difference  in inputs.  We  also have  questions  about 
whether  these  differences  in inputs  are  related  to differences  in outcomes.  We believe 
that  to try to accurately  measure  all the  factors  that  influence  costs  and  to relate  those 
inputs  to outcomes  would  be  extremely  difficult  and very costly. We  fully acknowledge 
that  the  needs  of States  may vaxy.  We  are  not  at all certain  that  the  current  system 
responds  better  than  any of the  options  we present. 
lhe rernxt dixs  not fudk addrtxr the mos and cons of the vatious thndbw  o@iOns 
This report  was meant  to suggest  logical  options  to the  current  cost  reimbursement 
system  for administrative  costs.  These  options  have  been  discussed  and  debated  at 
B-5  different  times  over  the  past  ten  years  by various  administrations.  However,  we did add 
language  is several  places  to remind  the  reader  that  some  options  might  not  address 
specific  problems  encountered  by each  State.  We  point  out  that  this is also  a problem 
with the  current  system.  We  also agree  that  once  a general  approach  is decided  upon, 
more  detailed  analysis  can be  performed.  We had  already  stated  this explicitly  in the 
report. 
B-6
 ,*
,...W,, 
*.*  % 
; 4/    DEPARTMENT  OF HEALTH & HUMAN SERVICES 
:
.
8
% 
++QW 
ADMINISTRATION  FOR CHILDREN  AND  FAMI 
Office  of  the  Assistant  secretary,  Suite  600 
370  LEnfant  Promenade,  S,W. 
Washington,  D.C,  20447 
DATE :  Deamber  16,  1994 
TO:	 June Gibbs  Brown 
Inspector  General 
FROM:  Mary  Jo Bane 
Assistant Secretary~TQ_4_ 
for Children and Families 
SUBJECT:  Comments - OIG Draft Report: IIwelfare  Administrative 
costs, OEI-05-91-01080

As requested, we have reviewed the subject Draft Report and find

it unchanged from the previous draft submitted to us for comments

in March 1993.  While minor modifications have  been made to the 
current draft, a few of the comments we provided to the OIG 
earlier this year have been incorporated. The substance of the 
material in the Backgroundand the five Alternate Funding

Optionsm sections is the same as the 1993 Draft.

We believe

We have serious concerns about the present Draft. 
previously provided comments, along with those of HCFA and FNS,

should be incorporated. AS the report now stands, a distort@d

picture of administrative costs is given when the three programs

are combined.  There are considerable differences in the policies 
and procedures of the respective programs which are  not taken 
into account. 
Furthermore, we believe that the report should make clear that

the present administrationof these programs is not out of

control.  We appreciate the concerns about the administrative

costs of thesa three programs, but the report does not provide

sufficient analysis to accurately portray the complexities of the

issues, and it does not sufficiently discuss the advantages and

disadvantages of the options available.  Each of the listed

options could cause serious problems, and could adversely affect

specific States in different ways.  We believe the discussion of

options should be expanded to fully discuss the consequences and

potential problems associated with each option.  As it stands,

the options might be perceived as simple solutions to a very

complex issue.

In sunmary, the report does not:

(1) Establish that there is a major problem with funding of

administrative costs.

B-7
 Page 2 - June Gibbs Brown 
(2)Adequately explore the reasons for the disparities among

the States for each of the three programs.

(3) Fully address the pros and cons of the various funding

op~ions.

We continue to believe that the administrative cost for tie three

programs needs to be examined in greater detail before any

conclusions or alternative options are developed.

B-8
 .-f.
.*.
.
., 
..,.
,  <(, 
+&
DEPARTMENT  OF HEALTH & I-IU,%IANSERVICES  office  of the  Secre\a~ 
..  \ 
Washington,  D.C.  20201 
DEC20 /994 
TO:	 June Gibbs Brown

InspectorGeneral

FROM:	 Assistant Secretary for

Planning and Evaluation

SUBJECT :	 OIG Draft Report: WelfareAdministrative Cost%J

OEI-O5-91-O1O8O

This responds to your request for comments on the dratc OIG

report entitled, WelfareAdministrativeCosts.  We are glad the

Office of the InspectorGeneral addressed many of the concerns

raised regarding an earlier draft of this report.  This is a

significantly improved report.  However, several conceptual

problems remain.

  Failure to em~hasize the declines in administrative costs 
p~  According to data in the report, the

rate of increase in administrativecosts for both AFDC and

food stamps is lower than the rate of increase in the number

of clients in those two programs.  Only for Medicaid do

administrative costs increase faster than the increase in

clients, suggesting that much of the problem is the rapid

pace of health care inflation.

While the draft report analyzes State administrative 
expenditure data from 1987 to 1992, more  recent data for 
1993 and 1994 show a lower rate of increase.  In fact, per 
client administrativecosts have actually been declining

recently, even in Medicaid.  In addition, the report should

discuss the reasons for its choice of starting and ending

years, 1987 to 1992.

	 The reDorts estimates of Dotential savinas are overstated. 
The repqrts projections for administrative costs for AFDC, 
food stamps, and Medicaid are between $3.5 and $5.6 billion

.-z  than the AdministrationsMid-Session Review

estimates for 1995-1999. Since the reports baseline

projections are too high, the estimates of potential savings

are also too high.

not bad  er se.  The report sees 
	  
disparities in p;r capita administrativecosts and in rates 
of increase or decrease among States as inherently bad and 
in need of correction. But the report does not explain why

disparity is bad and it should at least discuss the reasons

why reducing disparity would lead to desirable outcomes.

B-9
 Page 2 - June Gibbs Brown 
Disparities among States are to be expected, however, and

many things could explain such variation.  For example,

Texas is cited as a State with low administrative costs per

client, yet it is atypical.  Texas has much lower Medicaid

administrative costs than other States because it pays an

insurance provider a per capita amount to finance most 
Medicaid  services.  Since  the insurance  provider  handles  all 
the  administrative  details,  the  State  has  minimal  Medicaid 
administrative  costs. 
David T. Ellwood

B-10
   ![(, 
..-  Jg,. 
~  DEPART.MEINT  OF  HEALTH  & HULMAN  SERVICES  Of f(ce  or @W*  Cretarj 
: 
: 
-. 
%,* 
43*,. ,.  Washtngt6@w,43?  20.20~
NOv
2 I  1994 
Jw/
MEMowUM  TO  THE  INSPECTOR  GENERAL 
From  :  Kenneth  S.  Apf  el 
Assistant  Secretary  for  Management  and  Budget 
Subject:  OIG  Draft  Report:  Welfare  Administrative  Costs, 
OEI-O5-91-O1O8O 
This responds to your request for comments on the draft OIG

report entitled, Welfare AdministrativeCosts.t We applaud the

Office of the Inspector General for its efforts to identify a

range of options for policymakers to consider in thinking about

administrative costs and offer the following comments.

  ~O
 t ear est  -Session Estimates.

The OIG~s projected administrativecosts for the AFDC, Food

Stamps and Medicaid programs, for FY 1995-FY 1999, are

higher than current estimates contained in the

Administration~s Mid-Session Review for 1995-1999.

We recognize that there are many reasons for variance  in 
long range estimates.  Key among these is the time period 
used for the ~basisof the estimate.  Beginning  in 1989, 
and continuing through 1991, all three of these programs 
experienced  explosive caseload growth, accompanied  by 
substantial  increases in benefits and administrative  costs. 
However,  in the last several years  (1993and 1994) caseload 
and  costs  have  grown  at  substantially  lower  levels,  and 
these  lower  growth  rates  are  reflected  in  the 
Administrationts  Mid-Session estimates. 
My staff  will  provide  you  with  these  estimates.  I  would 
note that there are many valid reasons for  varying 
projections,  especially  in  programs  experiencing  such 
fundamental  changes. 
.  *
 Difference  between admznistrative cost arowth  n AFDC and
Food  Sta~.  and  n  e dicai~.  In  recent  years,  AFDC  and 
Food  Stamps  administrative  costs  have  been  relatively 
stable,  with  moderate  growth  of  less  than  ten  percent 
annually.  Expenditures  have  been  relatively  close  to 
Administration  estimates.  on  the  other  hand,  Medicaid 
administrative  costs  have  been  more  volatile  and  less

accurately  projected.  In  considering  future  options, this

variance  in administrative  cost growth needs to recognize

that approaches  and solutions may  be different  for each of

these programs.

 ~Rde ato s  etw e 
caseload aroWth .  A variety  of factors contribute  to 
administrative  costs, one of which is caseload.  Other 
B-n  factors  which  influence  administrative  cost growth include 
policy changes such as waiver demonstrations and/or welfare 
reform, State FTE constraints, automated systems development 
costs, political and timing issues, economic issues and 
family composition. 
 DisDaritv amona Stateq.  The report recognizes  that there 
are disparities  across States in administrative 
costs/recipient.  In many cases this disparity  is the result 
of variation  in services provided by States,  the 
comprehensiveness  of their programs, and the e%tent to which 
they have sought to make clients more self sufficient by 
lowering caseload ratios. 
  An anticipated

outcome of implementing the proposed opti&s  is that cost

allocation  systems and Federal monitoring could be

simplified.  To achieve such simplification may also

necessitate  inclusion of a broader spectrum of programs,

including Foster Care, Child Support or related programs

under the new funding mechanism.

My staff has several other editorial recommendations  that will be

provided  separately to your staff.

B-12

  .  APPENDIX  C

Endnotes 
1.  OMB  Circular A-87,  cost  Principles  for  State  and  Local 
Governments. ~$Attachment A,  p. 6. 
2. Congressional  Budget Office, Reducing the Deficit.  February

1992, p. 232.

3. Department of Health and Human Services, Office of the Inspector

General, Office of Audit Services.  Draft report # A-12-92-00014,

Reforminu  the  Svstem  for  Determination  of  State  and  Local

Government AdministrativelIndirect  Costs.  May 21, 1991, pi.

4. Ibid, pp. iii.

5. Ibid, p. 25.

6. Ibid, p. i.

7. Savings estimates from the reduction of special match rates in

the AFDC program  come from the Agency  for Children  and Families.

They estimate  $40 million  in savings in FY 95 and $50 million  in

each  succeeding  year.  The  Food  and  Nutrition  Service  in  the

Department of Agriculture estimated savings at $40 million in FY 95

and each succeeding year.  For ease of calculation, we use a figure

of $90 million  in savings for each year from FY 95-FY 99.

8. The Census Bureau percentages  used are published  in: tOverview

of Entitlement Programs,  FY 1992 Green Book. Committee on Ways and

Means, U.S. House of Representatives.  p.1384.

c-1