Testimony Before the United States House of Representatives 
Committee on Energy and Commerce: 
Subcommittee on Health 
 
 
 
   
Examining Medicaid and CHIPs  
Federal Medical Assistance Percentage  
 
Testimony of: 
 
John Hagg 
Director of Medicaid Audits  
Office of Audit Services 
Office of Inspector General  
Department of Health and Human Services 
 
 
 
 
February 10, 2016 
10am 
Location:  Rayburn House Office Building, Room 2123 
   
 
Testimony of: 
John Hagg 
Director of Medicaid Audits 
Office of Inspector General, U.S. Department of Health and Human Services 
  
Good morning, Chairman Pitts, Ranking Member Green, and other distinguished members of the 
Committee.  Thank you for the opportunity to testify about the Office of Inspector Generals 
(OIG) oversight of the Medicaid program.  OIG has identified protecting the integrity of the 
expanding Medicaid program as a top management challenge for the Department of Health and 
Human Services (HHS).   
 
My testimony today will focus on the Federal Governments role with respect to financing the 
Medicaid program through the Federal matching rates.  As a partner with the Federal 
Government, States have an obligation to ensure that Federal dollars are spent accurately and in 
accordance with program rules.  As discussed with Committee staff, I will cover two areas of 
vulnerability identified by our work related to Federal matching.  First, OIG audits have found 
that some States claim Federal reimbursement for expenditures that do not qualify for enhanced 
matching rates.  Second, our work has also found some States that use financing mechanisms to 
shift Medicaid costs to the Federal Government, thus distorting the matching rates.     
 
OIGs mission is to protect the integrity of the HHS programs and the health and welfare of the 
people they serve.  We advance our mission through a nationwide network of audits, evaluations, 
investigations, enforcement actions, and compliance efforts.  Activities directed at the Medicaid 
program are a critical component of our work.  Between Federal fiscal years (FY) 2011 and 
2015, annual Medicaid expenditures rose more than 25 percent, from $430 billion to more than 
$538 billion, and Medicaid now serves more than 72 million individuals.  By Federal FY 2023, 
Medicaid is projected to have annual expenditures of $835 billion and serve 79 million 
individuals. 
 
 
The Medicaid Federal-State Partnership 
 
The Medicaid program provides medical assistance to low-income individuals and individuals 
with disabilities.  Since the inception of Medicaid, the responsibility for administering and 
funding the program has been shared between the Federal Government and the States.  At the 
Federal level, the Centers for Medicare & Medicaid Services (CMS) administers Medicaid.  Each 
State administers its Medicaid program in accordance with a CMS-approved State plan.  
Although States have considerable flexibility in designing and operating their Medicaid program, 
each State must comply with applicable Federal rules, including a requirement that payment for 
care be consistent with efficiency, economy, and high quality of care.   
 
The Federal Government pays for its share of a States medical assistance expenditures according 
to a formula defined in the Social Security Act.  That share is known as the Federal medical 
assistance percentage (FMAP).  Each year, as required by the Social Security Act, the Secretary 
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of Health and Human Services calculates and publishes FMAP rates.  The FMAP rates that apply 
for most medical service costs are determined based on a States relative per capita income and 
by law cannot be lower than 50 percent and cannot exceed 83 percent.  The average regular 
FMAP is 57 percent.   
 
States can receive enhanced FMAP rates for certain situations, populations, providers, and 
services.  For example, the Patient Protection and Affordable Care Act (ACA) provides an initial 
FMAP rate of 100 percent for expenditures related to newly eligible individuals in States that 
choose to cover that population.  Other examples of enhanced FMAP rates for specific 
expenditures include those for family planning (90-percent FMAP) and services provided 
through an Indian Health Service (IHS) facility (100-percent FMAP).   
 
 
Ensuring the Accuracy of Enhanced State Matching Rates 
 
While enhanced FMAP rates provide States with additional Federal funding for specified 
populations and services, they also increase the risk that expenditures could end up in incorrect 
categories.  This potentially shifts a greater financial burden to the Federal Government.  I will 
discuss three specific types of expenditures that we have found incorrectly charged to enhanced 
FMAP categories.  These include family planning services, services provided in IHS facilities, 
and State adjustments to prior Federal reimbursements. 
 
Expenditures Charged to Incorrect FMAP CategoriesFamily Planning Services 
 
States are required to furnish certain family planning services and supplies and can receive 
Federal reimbursement for these services and supplies at the enhanced FMAP of 90 percent. 
OIG has conducted a number of audits involving State Medicaid agencies family planning 
claims reimbursed at the enhanced rate.  The reviews covered claims for inpatient, clinic, 
laboratory, and pharmacy services, as well as supplies claimed as family planning at the 
enhanced rate. 
 
Most State agencies we audited did not fully comply with Federal and State requirements for 
claiming the enhanced rate for family planning services and supplies.  Most State agencies 
claimed the 90-percent enhanced family planning rate for services that were Medicaid eligible 
but did not qualify as family planning services.  These services should have been billed at the 
regular FMAP.  We also found that some State agencies submitted claims at the enhanced FMAP 
for duplicated claims, as well as claims for services that were not Medicaid eligible at all.  As a 
result, OIG recommended that 19 States return a total of $82.7 million.   
 
Expenditures Charged to Incorrect FMAP CategoriesIndian Health Service 
 
Medicaid services that are provided through IHS facilities also receive an enhanced FMAP, with 
the Federal Government paying 100 percent.  We have conducted reviews in Indiana, California, 
Oregon, Alaska, and South Carolina to determine whether these States correctly claimed 
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Medicaid expenditures for services provided through IHS facilities.  Our work has found that 
States are not always correctly claiming FMAP for these services.  
 
In two States, Indiana and Alaska, we found the State agencies incorrectly claimed $2.3 million 
in Medicaid expenditures for IHS facilities.  Indiana overstated the Federal share of Medicaid 
expenditures by $993,000.  Although these expenditures were Medicaid services and eligible for 
Federal reimbursement at the regular FMAP rate, they were not services provided in an IHS 
facility and did not qualify for the enhanced 100-percent rate.  Alaska overstated the Federal 
share of IHS Medicaid expenditures by more than $1.3 million because of data entry errors.   
 
In similar audits in Oregon and South Carolina, we found that although the State agencies 
correctly claimed IHS expenditures, they incorrectly claimed ACA enhanced primary care 
physician payment expenditures and ACA expenditures for newly eligible individuals under 
the category of IHS expenditures.  The States should have claimed these costs under the 
appropriate FMAP category.  In future years, as the enhanced FMAPs for ACA newly eligible 
individuals decrease from 100 percent to 90 percent by 2020, there will be an impact if States 
continue to incorrectly claim expenditures for this population at the 100-percent FMAP for IHS 
expenditures. 
 
While these reviews have not generally found a significant financial impact on the Medicaid 
program resulting from these errors, they show that States need to improve how they report and 
claim Federal reimbursement for these services. 
 
Incorrect FMAP for Federal Share Adjustments 
 
The Form CMS 64 is used by State agencies each quarter to make adjustments for any identified 
overpayment or underpayment.  State agencies regularly make adjustments to prior claims for 
Federal reimbursement for a variety of reasons, including correcting inaccurate provider billings 
and retroactive changes in provider payment rates.  We have conducted a number of reviews of 
States to determine whether correct FMAPs were used when reporting claim adjustments.  At the 
time of our audits, FMAP rates were temporarily increased due to the American Recovery and 
Reinvestment Act of 2009. 
 
In Massachusetts and Maine, we found that the State agency did not always use the correct 
FMAPs when processing claim adjustments.  Specifically, the State agency processed the whole 
amount of adjusted claims as new expenditures rather than treating only the increases as new 
expenditures.  Overall, we identified over $110 million of overpayments to these two States 
involving more than 2.5 million claims. 
 
Ongoing and Planned OIG ReviewsACA Enhanced FMAP Areas 
 
We are reviewing various enhanced FMAP payment provisions implemented under the ACA to 
determine whether States correctly applied enhanced FMAP payment provisions of the ACA.  
The following areas are part of OIGs planned and ongoing work:  
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  Enhanced Federal Medical Assistance Percentage for newly eligible individuals.  OIG 
is reviewing selected States Medicaid claims to determine whether States correctly 
applied the enhanced FMAP payment provisions of the ACA.  The ACA, section 2001, 
authorizes States to claim FMAP of 100 percent until 2017 for services provided to 
individuals who are newly eligible under Medicaid expansion.   
 
  Enhanced Federal Medical Assistance PercentagePrimary Care Payment Bump.  OIG is 
reviewing selected States Medicaid claims to determine whether States correctly applied 
enhanced FMAP payment provisions of the ACA.  The ACA, section 1202, required that 
for 2013 and 2014 Medicaid payments to primary care providers be at least equal to 
Medicare payments to primary care providers.  During these years, the Federal 
Government should have paid 100-percent FMAP for the difference between the 
Medicare rate and the Medicaid rate that had been in effect. 
 
  Community First Choice State plan option under the ACA.  OIG will review Community 
First Choice (CFC) payments to determine whether the payments are proper and 
allowable.  Section 2401 of ACA added section 1915(k) to the Social Security Act, a new 
Medicaid State plan option that allows States to provide statewide home and community-
based attendant services and support to individuals who would otherwise require an 
institutional level of care.  States that elect this option can receive a 6-percent increase in 
their FMAP for CFC services.  
 
  Payments to States under the Balancing Incentive Program.  OIG is reviewing Balancing 
Incentive Program (BIP) expenditures in selected States to ensure that the expenditures 
were for eligible Medicaid long-term services and support (LTSS) and to determine 
whether the States used the additional enhanced Federal match correctly.  Under the BIP 
(established by section 10202 of the ACA), eligible States can receive either a 2-percent 
or 5-percent increase in their FMAP for eligible Medicaid LTSS expenditures. 
 
 
State Policies That Result in Inflated Federal Costs 
 
In addition to vulnerabilities that exist with enhanced FMAP categories, the shared nature of 
Medicaid financing provides opportunities for States to shift costs and distort the Federal-State 
cost sharing partnership.  In a September 2014 OIG Spotlight article entitled Medicaid:  State 
Policies that Result in Inflated Federal Costs, we cited a number of examples of State policies 
that caused the Federal Government to pay more than its share of Medicaid expenditures.  While 
mechanisms such as provider taxes, intergovernmental transfers and upper payment limits, and 
inflated payments rates increase Federal funding that States receive, they cause a greater burden 
for financing the Medicaid program to be placed on the Federal Government.  Thus, they distort 
statutorily defined FMAP rates and undermine the Federal-State partnership in financing health 
care. 
 
 
 
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Health-Care Provider Taxes 
 
Health-care provider taxes can distort the Federal-State funding partnership.  When used 
inconsistent with the law, the effects can be significant.  In Federal FY 2015, States reported to 
CMS $21.9 billion in health-care-related tax collections.  If a tax is health care related, it must be 
permissible to be used to fund the State share of the Medicaid program.  To be permissible, a 
health-care-related tax:   
 
  must be broad based or apply to all services within a class,  
 
  must be uniform in that all providers are taxed at the same rate, and 
 
  must not allow arrangements that return the collected taxes directly or indirectly 
to the taxpayer (hold-harmless arrangements). 
 
In a 2014 review, we found that a gross receipts tax on Medicaid managed care organizations in 
Pennsylvania appeared to be an impermissible health-care-related tax under Federal 
requirements.  OIG found that Pennsylvania applied a portion of what it collected from the tax to 
its share of Medicaid costs and, as a result, obtained nearly $1 billion in Federal Medicaid funds 
from 2009 through 2012.  We recommended that CMS clarify its policy concerning permissible 
health-care-related taxes.  In July 2014, CMS issued guidance to State Medicaid Directors and 
State Health Officials to clarify the taxation of health-care-related services and items.  We are 
currently performing work to determine whether States are in compliance with the July 2014 
guidance.   
 
Intergovernmental Transfers and Upper Payment Limits 
 
State policies that inflate Federal costs for Medicaid are not new.  In a series of reports from 
2000 to 2005, we found examples in which States developed mechanisms to apply money from 
intergovernmental transfers (IGT) to the States' share of Medicaid costs.  IGTs are transfers of 
non-Federal public funds between State and/or local public Medicaid providers and the State 
Medicaid agency.  In essence, these transfers increased the amount of Medicaid expenditures the 
Federal Government would have to cover and reduced the amount of the States share of those 
same expenditures.  In some cases, States transferred the additional Federal Medicaid money to 
their general treasury funds to use for a range of purposes with no direct link to improving 
quality of care or increasing services to Medicaid beneficiaries.   
 
The most conspicuous use of the IGT mechanism centered on supplemental payments available 
under upper payment limit (UPL) rules.  The UPL is an estimate of the maximum amount that 
would be paid to a category of Medicaid providers (usually hospitals and nursing homes) under 
Medicare payment principles.  The difference between the States reimbursement rate and the 
UPL is called a supplemental payment.  Generally, State payments that exceed UPLs do not 
qualify for Federal matching funds. 
 
Our reviews looked at States use of IGTs in which some or all of the Medicaid funds directed to 
local public nursing facilities as supplemental payments made under UPL rules were returned to 
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the States instead of being retained at the facilities for the care of the patients.  In each review, 
we found that the total Medicaid payments (per diem rate plus supplemental payments) were 
sufficient to cover operating costs, but the net payments were not.  This was because the nursing 
facilities were required to return substantial portions of their supplemental payments to the States 
to be used for other purposes.  As a result, they were underfunded and we believe that this had a 
negative effect on the quality of care provided in the facilities. 
 
Both Congress and CMS took action to close this loophole by creating three aggregate 
UPLsfor State-owned providers, non-State-owned government providers (i.e., county-owned) 
and private providers.  The creation of a separate aggregate payment limit for non-State 
government-owned facilities effectively reduced the amount of funds that States could gain by 
requiring public providers to return Medicaid payments through IGTs.  While these changes 
dramatically improved the situation, they did not entirely eliminate the problem because 
regulations do not require that the supplemental funds be retained by the targeted facilities.  
Since funds are not required to be spent by the facility, States can continue to divert 
supplemental payments to other purposes. 
 
Inflated Payment Rates 
 
Some States have also inflated payment rates to providers in an effort to enhance Federal 
reimbursement.  Medicaid regulations allow States to pay different rates to the same class of 
providers as long as the payments, in aggregate, do not exceed what Medicare would pay for the 
service.  Developmental centers, a type of facility providing care for beneficiaries with 
intellectual and developmental disabilities, do not have an equivalent Medicare benefit to use as 
a guideline for Medicaid reimbursement.  In a review of the New York Medicaid program, we 
found that payment rates for developmental centers were based on total reimbursable operating 
costs, which reflected several factors, but did not reflect the actual cost of the service.  This was 
particularly concerning because the daily payment rate for a Medicaid beneficiary in a 
developmental center jumped from $195 per day in 1985 to $4,116 a day in 2009, more than nine 
times the rate of increase in that timeframe at similar care centers.  Put in context, if New York 
used actual costs in calculating its payment rates for FY 2009, payments would have been $1.41 
billion less, saving the Federal Government $701 million.   
 
Since we issued our report, CMS has taken action to recover a portion of the payments from 
State FY 20102011 as well as to retroactively adjust reimbursement rates for State FY 
20132014, which were based on data from State FY 20102011.  Since Medicare does not pay 
for these services, CMS found that these payments violated previously issued guidance on UPLs 
requiring States to pay on the basis of reasonable cost.  On March 20, 2015, CMS and New York 
State agreed to a settlement that would result in a repayment of $1.95 billion. 
 
We found similar evidence of inflated payments in a review of New Yorks Medicaid rates for 
residential rehabilitation services.  These services are covered under a waiver program, and 
payment rates are calculated according to three factors set forth in 1992, which do not include 
actual costs.  Examining payments in FY 2010, we found that the payment rate for residential 
rehabilitation services at State-operated residences was more than double the average rate at 
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privately operated residences.  If New York had used actual costs to calculate payment rates for 
FY 2011, total reimbursement would have been $692 million less than what the State claimed, a 
reduction of $346 million in the Federal Government's share. 
 
Corrective Action is Still Needed to Correct State Policies That Inflate Federal Costs 
 
Collectively, our work suggests a need for a definitive regulation linking Medicaid payments to 
public providers to the actual cost of service.  In January 2007, CMS proposed a rule that would 
have limited Medicaid reimbursement rates for public providers to providers costs.  CMS 
published the final rule in May 2007.  However, this occurred during a congressional moratorium 
prohibiting the implementation of such a rule for 1 year, and a 2008 U.S. District Court decision 
forced CMS to eventually withdraw the regulation. 
 
We continue to recommend that CMS provide States with definitive guidance for calculating the 
Federal UPL, which should include using facility-specific UPLs that are based on actual cost 
report data.   
 
 
Conclusion  
  
The Federal and State Governments share responsibility for operating the Medicaid program 
consistent with the Social Security Act.  Within Federal and State guidelines, States fund their 
share of the program.  States have considerable discretion in setting rates, paying claims, 
enrolling providers and beneficiaries, and claiming expenditures.  States share accountability 
with the Federal Government for the integrity of the total investment of dollars in the Medicaid 
program and the extent to which that investment produces value for beneficiaries and taxpayers.  
This Federal-State partnership is central to the success of the Medicaid program. 
 
Given the recent and projected growth in Medicaid, it is critical that CMS and the State Medicaid 
agencies continue to focus on strengthening the integrity of the Medicaid program and 
compliance with Medicaid rules.  OIG is committed to providing effective oversight of the 
growing Medicaid program to ensure that funds are spent appropriately and in accordance with 
program rules, that fraud and abuse is detected and prevented, and that eligible beneficiaries 
receive needed and appropriate health care services.   
 
This concludes my testimony.  I would be happy to answer your questions. 
 
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