OFFICE OF 
INSPECTOR GENERAL 
CMS Oversight of 
Cost-Avoidance Waivers 
February 2004 
OEI-03-00-00031  O I G
FFICE OF  NSPECTOR  ENERAL

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 Services (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 the following 
operating components: 
Office of Audit Services 
The OIG's Office of Audit Services (OAS) provides all auditing services 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 Evaluation and Inspections 
The OIG's 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 the inspections reports generate rapid, accurate, 
and up-to-date information on the efficiency, vulnerability, and effectiveness of departmental programs. 
Office of Investigations 
The OIG's Office of Investigations (OI) 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 OI lead to criminal convictions, administrative sanctions, or civil 
monetary penalties.  The OI also oversees State Medicaid fraud control units which investigate and 
prosecute fraud and patient abuse in the Medicaid program. 
Office of Counsel to the Inspector General 
The Office of Counsel to the Inspector General (OCIG) provides general legal services to OIG, rendering 
advice and opinions on HHS programs and operations and providing all legal support in OIGs internal 
operations.  The OCIG imposes program exclusions and civil monetary penalties on health care providers 
and litigates those actions within the Department.  The OCIG also represents OIG in the global settlement 
of cases arising under the Civil False Claims Act, develops and monitors corporate integrity agreements, 
develops model compliance plans, renders advisory opinions on OIG sanctions to the health care 
community, and issues fraud alerts and other industry guidance.  E X E C U T I V E   S U M M A R Y  
OBJECTIVE 
This inspection reviewed the Centers for Medicare & Medicaid Servicess (CMSs) oversight 
of the cost-avoidance waiver process. 
BACKGROUND 
Millions of Medicaid beneficiaries have additional health insurance through third-party sources 
such as Medicare or private health insurance.  Because Medicaid is the payer of last resort, 
these third parties are liable for many claims submitted to Medicaid. When they receive claims 
that have a liable third-party payer, State Medicaid agencies can: (1) cost avoid, i.e., return the 
claim to the provider so that the provider can bill the liable third party, or (2) pay and chase, i.e., 
pay the providers claim and then seek recovery from the liable third party.  States report cost-
avoidance and pay-and-chase data to CMS as part of their CMS-64 report. 
States are required to use cost avoidance for most services unless the State has a waiver 
allowing it to pay and chase.  According to 42 CFR  433.138, CMS regional offices may grant 
these waivers when States demonstrate that pay and chase is as cost-effective as cost 
avoidance. The State Medicaid Manual requires States to renew their cost-avoidance waivers 
every 3 years.  The manual does not have any requirements addressing the retention of waiver 
documentation by the CMS regional offices. 
We reviewed the waiver process at all 10 CMS regional offices. We requested information from 
the regional staff about their offices policies and procedures regarding the waiver review 
process, the steps they take when reviewing waiver requests, and the criteria they use to 
examine cost-effectiveness. We collected information and documentation from the regional 
offices about waivers currently held by States as well as waiver requests that had been denied. 
In addition, we surveyed Medicaid agencies in 50 States and the District of Columbia on their 
third-party liability processes and policies. We requested financial data, cost-avoidance waiver 
information, and a description of any problems States encounter when attempting to recover 
money from third parties. Forty-eight States responded to our survey. 
i 
CMS Oversight of Waivers  OEI-03-00-00031  FINDINGS 
CMS and States disagreed about whether certain States were operating under 
approved waivers 
Fourteen States and their respective CMS regional offices provided contradictory responses as 
to whether these States had been approved for cost-avoidance waivers. Four States reported 
that they had cost-avoidance waivers for certain services, but their regional offices indicated that 
they did not.  In addition, 10 States reported that they did not have waivers for specific service 
types, yet the CMS regional office reported they did. Some of the inconsistencies over cost-
avoidance waivers may stem from the lack of documentation maintained by certain States and 
CMS regional offices. 
CMS approved cost-avoidance waiver requests that did not address the criteria for 
proving cost-effectiveness 
Federal regulations require that for a waiver request to be approved, States must show that the 
pay-and-chase method is as cost-effective as the cost-avoidance method. The State Medicaid 
Manual provides several examples of factors that may be used to determine cost-effectiveness, 
including average-cost-per- claim, denial rates of claims, administrative costs, and 
equipment/computer costs.  However, our review of 51 recent waiver requests (submitted by 18 
States from 7 regions) found that 6 of the 7 CMS regional offices approved waivers that did not 
address this criteria.  In all, CMS approved 46 of the 51 waiver requests that we reviewed.  For 
20 of these requests, States did not compare the cost-effectiveness of pay and chase to that of 
cost avoidance. CMS denied 5 of the 51 waiver requests, and 1 of the denials was due to a 
failure to prove cost-effectiveness.  In addition, unlike other regional offices, one CMS regional 
office is not requiring States to renew cost-avoidance waivers every 3 years as required by the 
State Medicaid Manual. Therefore, the data used to justify cost-avoidance waivers in this 
region could potentially be years out-of-date. 
CMS does not require States to report the data necessary to determine the cost-
effectiveness of cost-avoidance waivers 
While CMS requires the reporting of actual recovery amounts on the CMS-64, it does not 
require States to track the amounts they attempted to recover or the amounts validly denied by 
third parties. Keeping an accurate account of this information is necessary in order to evaluate 
the cost-effectiveness of both pay-and-chase and cost-avoidance efforts. We asked States to 
identify the amount they attempted to recover, the amount actually recovered, and the amount 
validly denied by third parties in 2000. Of the 34 States that had cost-avoidance waivers 
(according to CMS), 17 did not report attempted recoveries or validly denied figures to us. 
Without this data, we believe it would be difficult for CMS to make informed decisions 
concerning the cost-effectiveness of waivers. 
Another 17 States, however, did provide the requested data to us.  Figures reported by 14 of 
the 17 States that provided data showed $307 million in outstanding payments 
ii 
CMS Oversight of Waivers  OEI-03-00-00031  potentially owed by liable third parties in Federal fiscal year 2000. This money has been paid 
out by the Medicaid program, yet the dollars associated with these claims have not been 
returned to the Federal government and the States. 
RECOMMENDATIONS 
Our findings show that CMS is not exercising effective oversight of the cost-avoidance waiver 
process.  Because of the significant program dollars potentially at risk, we believe that proper 
oversight is critical. 
We understand that waivers provide Medicaid agencies with the flexibility to design effective 
programs for their individual States.  We also recognize that CMS has taken steps to review 
their guidance of the waiver process. However, based on our findings, we believe that CMS 
needs to provide more effective oversight of the cost-avoidance waiver process. 
We recommend that: 
CMS improve its oversight of the cost-avoidance waiver process by: 
	 Approving only waivers that meet the criteria for cost-effectiveness set forth by Federal 
regulation 
	 Ensuring that States abide by the State Medicaid Manuals requirement that waivers be 
renewed every 3 years 
  Requiring regional offices to retain proper documentation for all waivers 
CMS require States to track the amount of money they attempt to recover from 
third parties and the amount that is validly denied to assist in evaluating the cost-
effectiveness of both pay-and-chase and cost-avoidance efforts 
Agency Comments 
CMS concurs with our recommendation that they should improve its oversight of  the cost-
avoidance waiver process. CMS also concurs with our recommendation that States should 
track the amount they attempt to recover from third parties and the amount that is validly denied. 
However, CMS added that requiring States to track these amounts would produce little 
additional information of value, while at the same time taking away needed resources regarding 
the implementation of Health Insurance Portability and Accounting Act (HIPAA) requirements. 
With the implementation of HIPAA electronic billing standards, CMS believes providers will be 
able to bill liable third parties more easily, thereby reducing Medicaid third-party recovery 
activities.  CMS says that they will reassess the need to track the amount States attempt to 
recover from third parties and the amount that is validly denied within a few years of HIPAA 
implementation. 
iii 
CMS Oversight of Waivers  OEI-03-00-00031  In addition, CMS believes that our potential outstanding debt calculation may be significantly less 
than what is stated in our report.  CMS noted that it is difficult to actually quantify the dollars at 
risk since there are many factors that affect this calculation. For instance, States cast a wide net 
when seeking recoveries because they do not always know if individuals have third-party 
insurance coverage nor do they know the extent of coverage.  As a result, some third parties are 
not liable for the claims or liable for only a portion of the claim. In addition, States often do not 
receive responses from third parties regarding pursued claims. 
OIG Response 
In terms of our potential outstanding debt calculation, we simply based our calculation on figures 
reported to us by States. We recognize the fact that States may be pursuing dollars that in the 
end are not owed by third parties.  For this reason, we use the phrase as much as when 
referring to the potential outstanding debt estimate. Both the States and CMS would have a 
more accurate picture of the amount owed to the States if CMS were to implement our 
recommendation that States track the amount they attempt to recover from third parties and the 
amount that is validly denied. These data would assist CMS in determining the cost-
effectiveness of cost-avoidance waivers. Furthermore, we believe that non-responses from third 
parties should not be a factor when calculating how much money is owed to the State. The 
States entitlement to recovery does not change if a liable third party has not responded to the 
States request for recovery. 
iv 
CMS Oversight of Waivers  OEI-03-00-00031  T A B L E   O F   C O N T E N T S  
PAGE

EXECUTIVE SUMMARY ....................................................... i

INTRODUCTION ............................................................. 1

FINDINGS

CMS and States disagreed about whether a State had a waiver.......................... 5

CMS approved waivers that did not address criteria .................................. 7

CMS does not require States to report necessary data  ................................ 8

RECOMMENDATIONS ....................................................... 9

APPENDICES

A. States with Cost-Avoidance Waivers as of December 2001  ........................ 11

B. Centers for Medicare & Medicaid Servicess Comments........................... 13

ACKNOWLEDGMENTS ..................................................... 16

v 
CMS Oversight of Waivers  OEI-03-00-00031  I N T R O D U C T I O N  
OBJECTIVE 
This inspection reviewed the Centers for Medicare & Medicaid Servicess (CMSs) oversight 
of the cost-avoidance waiver process. 
BACKGROUND 
The Medicaid Program 
Medicaid is a jointly-funded Federal-State health insurance program for certain low income and 
medically needy individuals and families.  Individual States establish eligibility requirements, 
benefits packages, and payment rates for Medicaid under broad Federal standards set by CMS. 
In 2001, the Medicaid program served 42 million beneficiaries at a cost of $217 billion. 
Beneficiaries with Third-Party Insurance 
Millions of Medicaid beneficiaries have additional health insurance through third-party sources 
such as Medicare, State workers compensation, or private health insurance.  When a 
beneficiary has coverage under a third party, the Medicaid program is required by law to be the 
payer of last resort. Federal regulations (42 CFR  433.145) state that if Medicaid paid for a 
service that is covered by a third party, Medicaid has a right to recover the payment from the 
third party. 
According to 42 CFR  433.138, State Medicaid agencies must take reasonable measures to 
determine the liability of third-party payers in order to avoid paying claims inappropriately. 
Reasonable measures include: (1) collecting insurance information from prospective Medicaid 
beneficiaries; (2) conducting data exchanges with Social Security Administration wage and 
earnings files; and (3) conducting data exchanges with State files that contain information on 
wages, welfare enrollment, motor vehicle accidents, and workers compensation. Any of these 
sources may indicate the existence of other health insurances. 
Processing Claims with a Liable Third-Party Payer 
When State Medicaid agencies receive claims that may have a liable third-party payer, States 
can either: (1) cost avoid, i.e., return the claim to the provider so that the provider can bill the 
liable third party, or (2) pay and chase, i.e., pay the providers claim and then seek recovery 
from the liable third party. According to CMS data, Medicaid avoided paying almost $21 billion 
in claims in Federal fiscal year 2000, and collected another $683 million from liable third parties 
after originally paying the claims. 
1 
CMS Oversight of Waivers  OEI-03-00-00031  States are required to use the cost-avoidance method unless the claim received is for preventive 
pediatric services, prenatal care, or services provided through a parents court-ordered child 
support obligation.  However, States may apply to CMS for a waiver if they wish to pay and 
chase other types of claims. According to 42 CFR  433.139(c), Medicaid agencies may 
sometimes pay and chase claims without a waiver if they cannot determine the existence of third-
party coverage at the time the claim was received. 
Granting of Cost-Avoidance Waivers by CMS 
States request cost-avoidance waivers from the CMS regional office serving their geographic 
area. According to 42 CFR  433.138, a CMS regional office may approve a States waiver 
request if the State demonstrates that the pay-and-chase method is as cost-effective as the cost-
avoidance method.  The State Medicaid Manual provides several examples of factors that may 
be used to determine cost-effectiveness, including average-cost-per- claim, denial rates of 
claims, administrative costs, and equipment/computer costs.  Usually, a separate waiver request 
is submitted for each specific service type (e.g., pharmacy services). According to the State 
Medicaid Manual, States are required to renew their cost-avoidance waivers every 3 years. 
The manual does not have any requirements addressing the retention of waiver documentation 
by the CMS regional offices. 
Reporting of Third-Party Liability Data 
States report third-party liability data to CMS as part of their Quarterly Medicaid Statement of 
Expenditures for the Medical Assistance Program (Form CMS-64).  The CMS-64 report for 
each State is recorded in CMSs Medicaid Budget and Expenditure System. States are 
required to provide both the total amount that was cost avoided and the total amount collected 
through pay and chase on their CMS-64 report.  These amounts are reported as overall totals 
and are not subdivided by service type. States are not required to report the amount of money 
they attempted to recover or the amount that was validly denied by third parties on the CMS-
64. Validly denied refers to claims where the third party was found not to be liable for the 
amounts that the State attempted to recover. According to CMS, the data from the CMS-64 
report is used to monitor and evaluate the effectiveness of States third-party liability activity. 
Previous OIG Work 
A previous study conducted by the Office of Inspector General (OIG), Medicaid Recovery of 
Pharmacy Payments from Liable Third Parties (OEI-03-00-00030, August 2001), found 
that Medicaid was at risk of losing over 80 percent of the dollars it paid and chased for 
pharmacy claims. We recommended that CMS: (1) review States cost-avoidance waivers for 
pharmacy claims; (2) require States to track the amount they pay and chase for pharmacy 
claims; and (3) determine whether legislation is needed to assist States in recovering payments 
from liable third parties.  CMS concurred with all but one of our recommendations.  Specifically, 
in response to our recommendation on tracking pay-and-chase amounts, CMS concurred in 
theory, but wrote that, in the interest of State flexibility, it was reluctant to require States to 
collect this data. 
2 
CMS Oversight of Waivers  OEI-03-00-00031  Recent CMS Efforts to Review Waivers 
CMS has recently made a concerted effort to track States pay-and-chase activities. 
Specifically, on February 7, 2002, CMS central office sent a memorandum to all the regional 
offices on the subject of cost-avoidance waivers. The memorandum asked the regional offices 
to contact each State in their respective regions in order to identify: (1) any waivers that have 
been granted; (2) any pending waiver requests; and (3) situations where a State is using pay and 
chase without an approved waiver. According to the memorandum, once CMS central office 
obtains all the information requested from the regions, CMS will issue a follow-up memorandum 
that provides guidance on the waiver process. CMS has also conducted conference calls with 
third-party liability coordinators in some regions in an effort to develop potential guidelines and 
criteria for the review of waiver requests. 
METHODOLOGY 
State Medicaid Agency Data 
We sent a written request to the Medicaid directors at 51 State Medicaid agencies, including the 
District of Columbia, in November 2001. We asked the directors to distribute the survey to the 
staff best able to answer our questions. Representatives from 48 States responded to our 
request. The three States that did not respond were Michigan, New Jersey, and Rhode Island. 
In this report, we use the word State as a synonym for State Medicaid agency. 
We asked States to identify the cost-avoidance waivers they had been granted by CMS, to list 
any waivers that had been denied in the past 5 years, and to assess the cost-avoidance waiver 
review process.  We requested that States provide documentation verifying the cost-avoidance 
waiver information reported to us. This documentation included waiver requests from States, 
approval and denial letters from CMS regional offices, and any additional correspondence 
between the States and CMS regional offices regarding cost-avoidance waivers.  In addition, 
we requested that States identify any problems they encounter when trying to recover money 
from liable third parties. 
We also asked States to verify the accuracy of third-party liability data reported in the Medicaid 
Budget and Expenditure System. In November 2001, we accessed this system in order to 
obtain the amount each State cost-avoided and the amount each State recovered from third 
parties in Federal fiscal year 2000. If a State said that the amount originally reported in the 
Medicaid Budget and Expenditure System was not accurate, we asked them to provide a 
revised figure. We also asked States to report the amount they attempted to recover, the 
amount validly denied by third parties, and the amount unrecovered for Federal fiscal year 2000. 
For any State with waivers that reported each of these figures, we calculated the amount of 
money that was outstanding by adding the amount recovered to the amount validly 
3 
CMS Oversight of Waivers  OEI-03-00-00031  denied, and then subtracting the total from the amount the State attempted to recover. For 
States that indicated the recovery amount originally reported on the CMS-64 was incorrect, we 
used revised figures for this calculation. 
CMS Regional Office Data 
We reviewed the waiver process with staff from all 10 CMS regional offices. We requested 
information from regional staff about their offices policies and procedures regarding the waiver 
review process, the steps they take when reviewing waiver requests, and the criteria they use 
when determining cost-effectiveness.  We also asked staff from CMS regional offices to assess 
the waiver review process. We collected information about the waivers currently held by States 
in each region, and about any cost-avoidance waiver requests that had been denied.  A chart 
listing cost-avoidance waivers for each State is presented in Appendix A. 
Staff from OIG visited all but one CMS regional office to collect documentation verifying the 
cost-avoidance waiver information. This documentation consisted of waiver requests from 
States, approval and denial letters from CMS regional offices, and any additional 
correspondence between the States and CMS regional offices regarding cost-avoidance 
waivers. One CMS regional office mailed us documentation because we were unable to visit the 
office. Some regional offices were unable to provide documentation supporting the existence of 
all cost-avoidance waivers held by States in their region. We reviewed all recent State waiver 
requests (51) that were provided to us in order to determine if they met the criteria for approval 
described by Federal regulation. Neither the regulation nor the State Medicaid Manual 
provides specific instructions as to how States must meet the criteria, only that they must show 
that the pay-and-chase method is as cost-effective as the cost-avoidance method.  Therefore, 
we considered any request that compared the cost of performing pay and chase to the cost of 
performing cost avoidance to have met the criteria. 
This study was conducted in accordance with the Quality Standards for Inspections issued by 
the Presidents Council on Integrity and Efficiency. 
4 
CMS Oversight of Waivers  OEI-03-00-00031  F I N D I N G S  
CMS and States disagreed about whether certain States were 
operating under approved waivers 
The regional offices identified 73 waivers currently held by 34 States. For 21 of the 34 States, 
the only waiver in place was for pharmacy services. Appendix A lists the waivers that were 
approved according to CMS regional offices. 
Four States reported having cost-avoidance waivers when their respective CMS 
regional offices indicated they did not 
Four States reported that they had cost-avoidance waivers for certain services, but their CMS 
regional offices indicated that these States did not.  One of these States reported having a waiver 
for dental claims while its regional office indicated it did not. Another reported having a waiver 
for pharmacy claims and long-term care/home and community- based services for the disabled 
and elderly, while the regional office said it did not.  Neither State provided any documentation 
supporting their position.  However, documentation from the regional offices showed that the 
waivers claimed by these States had expired. For the other two States, one said it had a cost-
avoidance waiver for mental health evaluations, and the second reported it had waivers for their 
birth-to-three program and their school disability program. In both instances, the respective 
regional offices said that they were not aware of these waivers. Neither the State nor the CMS 
regional offices were able to provide documentation supporting their positions. 
Ten States reported not having waivers cited by their regional offices 
Ten States reported that they did not have waivers for the service types reported by their CMS 
regional office. For example, CMS said one State was operating under an approved waiver for 
pharmacy claims, but the State said that it did not have a pharmacy waiver.  The 10 States were 
represented by 6 different regional offices.  Out of the six regional offices, only one regional 
office was able to provide any documentation supporting the presence of cost-avoidance 
waivers.  Table 1 below shows the cases where CMS regional offices and States differed as to 
the number of waivers held by the States. 
5 
CMS Oversight of Waivers  OEI-03-00-00031  Table 1: Discrepancies in the Number of Waivers Reported by States and CMS 
Number of Waivers  Number of Waivers 
State  Reported by State  Reported by CMS Regional Office 
AK  7  6 
GA  0  1 
ID  0  2 
IL  0  1 
KS  0  4 
MN  0  1 
MO  7  6 
OH  0  1 
OR  1  6 
TN  0  1 
TX  1  2 
WI  3  1 
WV  0  1 
WY  4  2 
Source: OIG Survey of State Medicaid Agencies and OIG Interviews with CMS Regional Offices 
Inconsistencies concerning the presence of cost-avoidance waivers may stem 
from insufficient documentation 
Some of the inconsistencies concerning cost-avoidance waivers may stem from the lack of 
documentation maintained by certain States and CMS regional offices. Eight regional offices 
reported that at least one State in their region had a waiver.  However, only three of the eight 
regions had a comprehensive set of documentation that supported the existence of the waivers. 
These three offices were able to provide both the waiver requests and the regional response for 
the 36 different waivers currently in place in their regions. The other 5 regions reported that they 
had approved a total of 37 cost-avoidance waivers.  For two-thirds (25) of the 37 waivers, 
these 5 regional offices were unable to provide documentation supporting their existence.  For 
only 4 of the 37 waivers were the regional offices able to provide documentation showing that 
the waiver had actually been approved. For five waivers, the only documentation on file was the 
waiver request letter from the State. In another three instances, the regional office had 
documentation faxed in from the State prior to our interview. 
6 
CMS Oversight of Waivers  OEI-03-00-00031  CMS approved cost-avoidance waiver requests that did not 
address the criteria for proving cost-effectiveness 
Federal regulations (42 CFR  433.138) require that for a waiver request to be approved by 
CMS, a State must show that the pay-and-chase method is as cost-effective as the cost-
avoidance method.  The State Medicaid Manual provides several examples of factors that may 
be used to determine cost-effectiveness, including average-cost-per-claim, denial rates of claims, 
administrative costs, and equipment/computer costs. We requested that CMS regional offices 
provide the documentation for any current waivers. As previously mentioned, some CMS 
regional offices were unable to provide any documentation for a number of the waivers. We 
reviewed all of the recent waiver requests provided to us. There were 51 waiver requests 
submitted by 18 States from 7 different regions. If a State provided any comparison of the costs 
of performing pay and chase to the costs of performing cost avoidance, we considered that 
request to have addressed the approval criteria. However, our review found that six of the 
seven CMS regional offices approved waivers that did not address this criteria. 
CMS approved 46 of the 51 cost-avoidance waiver requests that we reviewed.  For 20 of these 
requests, States did not, as required, compare the cost-effectiveness of pay and chase to that of 
cost avoidance. In some of these cases, States provided data, such as the costs associated with 
performing pay and chase or the amount recovered through pay-and-chase efforts, but did not 
show how this data compared with any costs associated with performing cost avoidance. In 
other cases, States did not provide any financial data at all on pay and chase or cost avoidance, 
yet their waiver requests were still approved by CMS. Requests sometimes focused on 
provider issues (e.g., cost avoidance would drive providers out of business) and beneficiary 
issues (e.g., cost avoidance may reduce beneficiary access to care) instead of cost-effectiveness. 
Of the five waiver requests that were denied by CMS, only one was due to a failure to prove 
cost-effectiveness. Three of the requests were denied because the services were not generally 
covered by third parties; a fourth request was denied because beneficiaries eligible for the 
services had typically exhausted any third-party coverage. In these cases, CMS stated that 
waivers would create an unnecessary administrative burden for both the State and CMS. 
In addition, unlike other regional offices, one CMS regional office is not requiring States to 
renew cost-avoidance waivers every 3 years as required by the State Medicaid Manual. The 
eight States in this region are not required to submit updated data supporting the cost-
effectiveness of a waiver. Therefore, the data used to justify cost-avoidance waivers for States 
in this region could potentially be years out-of-date. 
7 
CMS Oversight of Waivers  OEI-03-00-00031  CMS does not require States to report the data necessary to 
determine the cost-effectiveness of cost-avoidance waivers 
While CMS requires the reporting of actual recovery amounts on the CMS-64, it does not 
require States to track the amounts they attempted to recover or the amounts validly denied by 
third parties. Validly denied refers to claims where the third party was found not to be liable 
for the amounts that the State attempted to recover. Keeping an accurate account of this type of 
financial information is necessary in order to evaluate the cost-effectiveness of both pay-and-
chase and cost-avoidance efforts. This is especially true for States with cost-avoidance waivers, 
where tracking the recovery rate of outstanding payments from third parties is of primary 
importance in determining the cost-effectiveness of the waivers. 
As part of our survey, we asked States to identify the amount they attempted to recover, the 
amount actually recovered, and the amount validly denied by third parties in 2000. Of the 34 
States that had cost-avoidance waivers (according to CMS), 17 did not report attempted 
recoveries or validly denied figures to us. Several of these States indicated that they were 
unable to determine these amounts, while other States simply provided no response. Without 
this data, we believe it would be difficult for CMS to make informed decisions concerning the 
cost-effectiveness of waivers. 
Another 17 States with cost-avoidance waivers did report attempted recovery, actual recovery, 
and validly denied amounts to us. Figures reported by three of the 17 States indicated no 
outstanding debts owed by liable third parties. However, 14 of the 17 States had $307 million 
in outstanding payments potentially owed by liable third parties in Federal fiscal year 2000. 
These 14 States identified $1.33 billion in potential recoveries from liable third parties. 
According to these States, $262 million of the $1.33 billion was actually recovered, and another 
$761 million was validly denied by third parties. The remaining $307 million is considered to be 
a potential outstanding debt because the money was neither recovered by the State nor validly 
denied by the third party.1 This money has been paid out by the Medicaid program, yet the 
dollars associated with these claims have not been returned to the Federal government and the 
States. 
1
It is important to note that all of the outstanding debt may not be attributable to services covered by a 
cost-avoidance waiver. Because States are statutorily required to pay and chase for certain types of services (e.g., 
preventive pediatric care), it is possible that portions of the outstanding debt stem from these services. 
8 
CMS Oversight of Waivers  OEI-03-00-00031  R E C O M M E N D A T I O N S  
Our findings show that CMS is not exercising effective oversight of the cost-avoidance waiver 
process.  Because of the significant program dollars potentially at risk, we believe that proper 
oversight is critical. 
CMS and the States were not in agreement as to whether certain States were operating under 
approved waivers.  The inconsistent responses may stem from the lack of documentation 
maintained by certain States and CMS regional offices. If regional offices are unsure of which 
States in their area even have cost-avoidance waivers, proper oversight would be difficult.  In 
addition, many waivers were granted by CMS despite the fact that cost-effectiveness was not 
sufficiently addressed. According to Federal regulation, cost-effectiveness is the sole criteria for 
a regional office to use when evaluating a waiver request. 
Furthermore, while CMS requires the reporting of actual recovery amounts on the  CMS-64, it 
does not require States to track the amounts they attempted to recover or the amounts validly 
denied by third parties. We believe that keeping an accurate account of this information is 
necessary in order to evaluate the cost-effectiveness of both pay-and-chase and cost-avoidance 
efforts. This is especially true for States with cost-avoidance waivers, where tracking the 
recovery rate of outstanding payments from third parties is of primary importance in determining 
the cost-effectiveness of the waivers. The fact that 14 States with waivers are potentially owed 
as much as $307 million by liable third parties leads us to question whether their waivers are 
truly cost-effective. 
We understand that waivers provide Medicaid agencies with the flexibility to design effective 
programs for their individual States.  We also recognize that CMS has taken steps to review 
their guidance of the waiver process. However, based on our findings, we believe that CMS 
needs to provide more effective oversight of the cost-avoidance waiver process. 
We recommend that: 
CMS improve its oversight of the cost-avoidance waiver process by: 
	 Approving only waivers that meet the criteria for cost-effectiveness set forth by Federal 
regulation 
	 Ensuring that States abide by the State Medicaid Manuals requirement that waivers be 
renewed every 3 years 
  Requiring regional offices to retain proper documentation for all waivers 
9 
CMS Oversight of Waivers  OEI-03-00-00031  CMS require States to track the amount of money they attempt to recover from 
third parties and the amount that is validly denied to assist in evaluating the cost-
effectiveness of both pay-and-chase and cost-avoidance efforts 
Agency Comments 
CMS concurs with our recommendation that the agency should improve its oversight of 
the cost-avoidance waiver process.  CMS also concurs with our recommendation that States 
should track the amount they attempt to recover from third parties and the amount that is validly 
denied.  However, CMS added that requiring States to track these amounts would produce little 
additional information of value, while at the same time taking away needed resources regarding 
the implementation of Health Insurance Portability and Accounting Act (HIPAA) requirements. 
With the implementation of HIPAA electronic billing standards, CMS believes providers will be 
able to bill liable third parties more easily, thereby reducing Medicaid third-party recovery 
activities.  CMS says that they will reassess the need to track the amount States attempt to 
recover from third parties and the amount that is validly denied within a few years of HIPAA 
implementation. 
In addition, CMS believes that our potential outstanding debt calculation may be significantly less 
than what is stated in our report.  CMS noted that it is difficult to actually quantify the dollars at 
risk since there are many factors that affect this calculation. For instance, States cast a wide net 
when seeking recoveries because they do not always know if individuals have third-party 
insurance coverage nor do they know the extent of coverage.  As a result, some third parties are 
not liable for the claims or liable for only a portion of the claim. In addition, States often do not 
receive responses from third parties regarding pursued claims. 
The full text of CMSs comments is presented in Appendix B. 
OIG Response 
In terms of our potential outstanding debt calculation, we simply based our calculation on figures 
reported to us by States. We recognize the fact that States may be pursuing dollars that in the 
end are not owed by third parties.  For this reason, we use the phrase as much as when 
referring to the potential outstanding debt estimate. Both the States and CMS would have a 
more accurate picture of the amount owed to the States if CMS were to implement our 
recommendation that States track the amount they attempt to recover from third parties and the 
amount that is validly denied. These data would assist CMS in determining the cost-
effectiveness of cost-avoidance waivers.  Furthermore, we believe that non-responses from third 
parties should not be a factor when calculating how much money is owed to the State. The 
States entitlement to recovery does not change if a liable third party has not responded to the 
States request for recovery. 
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CMS Oversight of Waivers  OEI-03-00-00031  A P P E N D I XA   
States with Cost-Avoidance Waivers as of December 2001

The table below presents the cost-avoidance waivers approved for States based on information from 
CMS regional offices. 
Region  State  Type of Service 
II  NJ  Intermediate Care Facilities for the Mentally Retarded 
Part B Services at State and County Hospitals 
III  DC  Pharmacy 
DE  Pharmacy 
MD  Pharmacy 
VA  Pharmacy 
WV  Pharmacy a 
IV  AL  Pharmacy 
FL  Pharmacy 
GA  Pharmacy a 
KY  Pharmacy 
MS  Pharmacy 
NC  Pharmacy 
SC  Part B Physician Crossovers 
Pharmacy 
TN  Pharmacy a 
V  IL  Pharmacy a 
IN  Pharmacy 
MN  Pharmacy a 
OH  Pharmacy a 
WI  Pharmacy b 
VI  LA  Pharmacy 
OK  Pharmacy 
TX  Pharmacy 
Long-term Care a 
VII  IA  Pharmacy 
KS  Community Mental Health a 
Long-term Care a 
Personal Care a 
Pharmacy a 
MO  Adult Day Health Care c 
Care for Mentally Retarded/Developmentally Disabled 
Non-Emergency Transportation 
Personal Care 
Pharmacy 
Respite Care 
NE  Long-term Care 
Pharmacy 
Private Duty Nursing 
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CMS Oversight of Waivers  OEI-03-00-00031  A P P E N D I XA   
Region  State  Type of Service 
VIII  MT  Audiology 
Dental 
Home and Community-Based Waiver Services 
Non-Emergency Transportation

Nursing Homes

Oxygen and Oxygen-related Services in Nursing Homes

Optometry

Personal Care 
Pharmacy 
ND  Pharmacy Claims under $100 
SD  Dental 
Optometry 
Pharmacy 
UT  Home and Community-Based Waiver Services 
Long-term Care 
Non-emergency Transport 
Pharmacy 
Tort 
WY  Care for Adults with Developmental Disabilities d 
Care for Children with Developmental Disabilities 
X  AK  Accommodations e 
Eyewear 
Home and Community-Based Waiver Services 
Personal Care 
Pharmacy 
Transportation 
ID  Nursing Homes a 
Pharmacy a 
OR  Intermediate Care Facilities for the Mentally Retarded a 
Institutes for the Mentally Diseased a 
Pharmacy 
School-based Rehabilitation Services a 
Targeted Case Management for Children in Foster Care a 
Targeted Case Management for the Developmentally Disabled a 
Source: CMS Regional Offices 
a While CMS reports the State has a waiver for this service type, the State reports it does not. 
b State reports it also has a waiver for its birth-to-three program and school disability program. 
c State reports it also has a waiver for Department of Mental Health annual evaluation. 
d State reports it also has a waiver for pharmacy claims and a waiver for long-term care/home and 
community-based services for the disabled and elderly. Documentation from CMS shows that these 
waivers have expired. 
e State reports it also has a waiver for dental claims. Documentation from CMS shows that the dental 
waiver request had expired. 
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CMS Oversight of Waivers  OEI-03-00-00031  A P P E N D I XB   
Centers for Medicare & Medicaid Servicess Comments

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CMS Oversight of Waivers  OEI-03-00-00031  A P P E N D I XB   
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CMS Oversight of Waivers  OEI-03-00-00031  A P P E N D I XB   
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CMS Oversight of Waivers  OEI-03-00-00031  A C K N O W L E D G M E N T S  
This report was prepared under the direction of Robert A. Vito, Regional Inspector General for 
Evaluation and Inspections in Philadelphia, and Linda M. Ragone, Deputy Regional Inspector General. 
Other principal Office of Evaluation and Inspections staff who contributed include: 
David Tawes, Team Leader  Linda Frisch, Program Specialist 
Tanaz Dutia, Program Analyst 
We would also like to acknowledge the following OEI staff for their assistance in this project: 
Christopher Gould, Region I

Vincent Grieber, Region II

Peggy Daniel, Region IV

Josiah Townsel, Region IV

Joseph Penkrot, Region V

Nancy Juhn, Region VI

Tricia Fields, Region VII

Christopher Tarbell, Region IX

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CMS Oversight of Waivers  OEI-03-00-00031