Testimony of: 
George M. Reeb 
Assistant Inspector General  
for the Centers for Medicare & Medicaid Audits 
Office of Inspector General, U.S. Department of Health and Human Services 
___________________________________________________________________________ 
Good morning Mr. Chairman and Members of the Committee.  I am here today to discuss 
States use of financing mechanisms to shift the cost of Medicaid to the Federal Government, 
contrary to statutory Federal and State sharing formulas.  In particular, I will discuss how 
States use their intergovernmental transfer (IGT) authority with regard to certain enhanced 
payments and the negative implications such transfers may have for the quality of care for 
Medicaid beneficiaries residing in local public nursing facilities.  I will describe how States 
divert funds away from their original purpose once the Federal share is received, leaving 
poorly performing public nursing facilities under-funded.  Then, referencing previous audits, 
I will summarize some problems we uncovered over the years with respect to tax and 
donation programs and disproportionate share hospital payments.  Finally, I will discuss 
some concerns emerging from our recent work in other Medicaid benefit areas and outline 
some accountability issues and basic principles to be followed in ensuring the financial 
integrity of the program. 
 
We have found that current policies and practices severely limit the ability of Congress, the 
Department of Health and Human Services, and State and local governments to manage, 
account for, and assess the benefits of Medicaid dollars.  Some financing mechanisms are 
designed solely to maximize Federal reimbursements to States, contrary to Federal and State 
cost-sharing principles, and serve to disguise the source and final use of both Federal and 
State funds.   
 
THE MEDICAID FEDERAL/STATE PARTNERSHIP 
 
Since the inception of the Medicaid program, the Federal Government and the States have 
shared in the cost of the program.  Each State Medicaid program is administered by the State 
in accordance with a State plan approved by the Centers for Medicare & Medicaid Services 
(CMS).  While the States have considerable flexibility in designing their State plans and 
operating their Medicaid programs, they must comply with broad Federal requirements.  The 
Federal Government pays its share of medical assistance expenditures to the States according 
to a defined formula, which yields the Federal medical assistance percentage (FMAP).  The 
FMAP can range from 50 percent to 83 percent, depending on each States relative per capita 
income.  My testimony deals with practices that circumvent these Federal/State matching 
requirements and cause the Federal Government to pay disproportionately more, without a 
corresponding benefit to the intended beneficiaries. 
 
ENHANCED PAYMENTS UNDER UPPER PAYMENT LIMIT RULES 
 
Intergovernmental transfers are transfers of non-federal public funds between State and/or 
local public Medicaid providers and the State Medicaid agency.  This is the most common 
__________________________________________________________________________________________ 
 
Senate Committee on Finance   Hearing:  June 28, 2005  Page 1   
 
method we have noted by which States divert funds from an intended purpose after drawing 
down the Federal share of the benefit. 
 
States use of IGTs to divert funds has the following consequences:  a States share of its 
Medicaid program inappropriately declines; Federal taxpayers pay more than their statutory 
share; and the increased Federal Medicaid funding derived from these financing mechanisms 
becomes comingled in general revenue accounts, where it can be used for purposes unrelated 
to Medicaid, including as the States match to draw down more Federal dollars for Medicaid 
and other federally matched grant programs.   
 
I would like to point out that there is virtually no need for a State to transfer funds to be used 
for another Medicaid purpose because States can simply claim Federal funding for any valid 
Medicaid expenditure.  States have the option of managing their Medicaid transactions in 
ways that are straightforward and auditable.  Generally, accountability is lost at the point that 
Medicaid funds are transferred into general revenue accounts, thereby placing the funds at 
risk of misuse. 
 
The most conspicuous use of the IGT mechanism in recent years has centered on enhanced 
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 an enhanced payment.  Generally, State payments 
that exceed UPLs do not qualify for Federal matching funds.  In short, the States use of 
IGTs as part of the UPL enhanced payment program has been primarily a financing 
mechanism designed to maximize the Federal share of Medicaid while effectively avoiding 
the Federal/State matching requirements.   
 
Medicaid regulations allow State Medicaid agencies 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 services.  Before new regulations took effect on March 13, 2001, State Medicaid 
agencies were able to calculate the total enhanced payment amount (the difference between 
the regular Medicaid payment and the Medicare payment amount for a similar service) on the 
basis of the aggregate of all private, State-operated, and city- or county-operated facilities.  
The entire amount could then be distributed to only city- and county-owned facilities.  The 
State could even direct the entire amount to only one such facility if it chose to do so.  The 
results of OIG audits demonstrated that billions of dollars were at risk and would continue to 
be at risk in the future unless substantive changes were made in the program. 
 
In accordance with our early findings and with the Benefits Improvement and Protection Act 
of 2000, CMS issued a final rule in 2001, which modified the UPL regulations.  The 
regulatory action created three aggregate upper payment limitsone each for private, State, 
and non-State government-operated facilities.  The creation of a separate aggregate payment 
limit for non-State government-owned facilities effectively reduces the amount of funds that 
States can gain by requiring public providers to return Medicaid payments through IGTs.  
The new regulations are being phased in gradually and will become fully effective on 
October 1, 2008.   
 
__________________________________________________________________________________________ 
 
Senate Committee on Finance   Hearing:  June 28, 2005  Page 2   
 
When fully implemented, these changes will dramatically limit this State manipulation of the 
Medicaid program.  However, the changes will not entirely eliminate this problem because 
the regulation still does not require that the enhanced funds be retained by the targeted 
facilities to provide covered services to Medicaid beneficiaries.  Thus, States continue to 
divert enhanced payments to other purposes. 
 
STATES USE OF IGTS:  EFFECT ON NURSING FACILITIES 
 
Some of our recent audits have explored States use of IGTs in which some or all of the 
Medicaid funds that were directed to local public nursing facilities as enhanced payments 
made under UPL rules were returned to the States instead of being retained at the facilities 
for the care of patients.  The Medicaid funding for such facilities is composed of per diem 
payments and enhanced payments.  When the States per diem rate is less than the UPL, 
some States provide enhanced payments to make up all or a portion of the difference. 
 
In the sections that follow, I will describe the results of audits covering various 3-year 
periods ending in 2001 or 2002.  Although the audit periods in some cases included enhanced 
payments made both before and after the new regulations, the new rules continue to allow 
States to require providers to return their Medicaid enhanced funds to the State.  The nursing 
facilities were selected for review because State survey and certification reviewers had 
identified them as having serious deficiencies in patient care.  Our objectives were to 
ascertain whether Medicaid payments to the nursing facilities were adequate to cover their 
operating costs and whether a link could be drawn between the quality of care of patients and 
the amount of Medicaid funding received. 
 
In every case, we found that the gross Medicaid per diem and enhanced payments were 
sufficient to cover operating costs, but the net payments were not.  The nursing facilities 
were all required to return substantial portions of their enhanced payments to the States to be 
used for other purposes.  As a result, the facilities were under funded.  We believe this under 
funding had a negative impact on quality of care.  In all four reports, we recommended that 
the State allow the facility administrators to retain sufficient funding to cover the costs of 
providing an adequate level of care to its residents.    
 
Generally, once the payments that had been directed to these facilities for patient care were 
returned to the States, the States were able to use the funds for any purpose, including to 
draw down new Federal matching funds for Medicaid or other Federal programs. 
 
State of New York:  Albany County Nursing Home1
 
The Medicaid combined per diem and enhanced payments made to Albany County Nursing 
Home in New York for our 3-year audit period were more than adequate to cover its 
operating costs.  However, after the nursing home returned 90 percent of its enhanced funds 
to the county and State, the net Medicaid payment retained by the facility was $22 million 
less than the facilitys total Medicaid operating costs for the period.   
 
                                                 
1 Report A-02-02-01020 
__________________________________________________________________________________________ 
 
Senate Committee on Finance   Hearing:  June 28, 2005  Page 3   
 
This diversion of funds took place despite the fact that the nursing home had received an 
immediate jeopardy rating from the State Department of Health.  An immediate jeopardy 
rating is the most unfavorable rating that can be issued.  The net Medicaid funding fell short 
of operating costs, and the nursing home did not fill all of its nursing positions.  This 
condition may have affected the quality of care provided to its residents.  During our audit 
period, the nursing home was significantly understaffed compared to the minimum number 
of positions specified in its budget. 
 
Of the $132 million total payments made to the facility during the period we reviewed, $91 
million was from UPL enhanced payments.  In New York, the States agreement with the 
counties only allowed the counties nursing homes to retain 10 percent of the UPL enhanced 
payments that were designated for them.  After a trail of transactions, the nursing home 
retained only $9.1 million of its $91 million in enhanced payments, as illustrated in the 
following chart: 
 
Flow of Medicaid Funds to/from Albany County Nursing Home 
 
Amounts shown are rounded. 
Federal  State  County  Albany County 
Government  Government  Government  Nursing Home 
1.  Drawdowns by State from Federal Government and county to holding account. 
2.  State payment to county nursing home operating bank account. 
3.  County transfer from nursing home operating account to county general fund. 
4.  State withdrawal from county general fund. 
5.  Amount designated through county budget for nursing home 
Note:  The chart represents the totals of funds that were contributed, drawn down, and moved over a period of 
3 years.   
 
The $9.1 million in enhanced payments, combined with the total per diem payments of 
$41 million totaled only about $50 million, which was about $22 million less than the 
facilitys total operating costs of about $72 million for the period reviewed. 
 
The county and State divided the remaining $82 million (90 percent of the enhanced payment 
amount) between them.  The State received $36.4 million, which fully reimbursed the State 
__________________________________________________________________________________________ 
 
Senate Committee on Finance   Hearing:  June 28, 2005  Page 4   
 
for its per diem contribution of $16 million and provided a surplus of $20 million that the 
State could use for any purpose.  The county was reimbursed 100 percent for its upper 
payment limit contribution.  The Federal Government, in effect, provided almost all of the 
nursing homes Medicaid funding, contrary to the principle that Medicaid is supposed to be a 
shared responsibility of the Federal and State Governments. 
 
State of Washington:  Newport Community Hospital, Long Term Care Unit2
 
Total Medicaid payments made to the Newport Community Hospitals long term care unit 
(nursing facility) during the audit period were adequate to cover its operating costs. 
However, after using IGTs to divert almost all of the enhanced payment funds to other 
purposes, the Medicaid amount that the State allowed Newport to retain was $290,000 less 
than Newports total Medicaid operating costs.  During the same period, the nursing home 
was understaffed, which may have affected the quality of care provided to its residents. 
Newport officials believed that they could improve quality of care if they had more funds to 
hire additional staff, provide more training, improve the facility, and purchase safety 
equipment.   
 
In addition to the States requiring Newport to return about 94 percent of its enhanced 
funding to the State, the State directed Newport to pay about 3 percent of its enhanced 
funding to other health organizations as well.  In effect, the Federal Government provided 
almost all of the nursing homes Medicaid funding, contrary to Federal/State cost-sharing 
principles.     
 
State of Tennessee:  Nashville Metropolitan Bordeaux Hospital, Long Term Care Unit3  
 
We found that the Medicaid payments made to Bordeaux Hospitals long term care unit were 
adequate to cover Medicaid-related costs, but net payments after IGTs were $22.8 million 
less than the facilitys total Medicaid operating costs for the audit period.  
 
In addition to the shortfall, Bordeaux did not retain enough Medicaid funding to fill all of its 
nursing positions, which may have affected the quality of care provided to its residents.  
  
During the audit period, Bordeauxs Medicaid operating costs were about $62.5 million.  
During the same period, initial Medicaid payments to the facility totaled $139.8 million.  
However, the State and the county required Bordeaux to return about 96 percent of its 
enhanced payments to the State.  We were concerned that the Federal Government 
effectively provided all of Bordeauxs Medicaid funding, contrary to Federal/State cost-
sharing principles.  The long term care facility was ultimately under funded, and the 
transferred funds were available to be used for other purposes.   
                                                 
2 Report A-10-04-00001. 
3 Report A-04-03-03023. 
__________________________________________________________________________________________ 
 
Senate Committee on Finance   Hearing:  June 28, 2005  Page 5   
 
 
State of New York:  A. Holly Patterson Extended Care Facility4  
 
OIG found that the total Medicaid payments to A. Holly Patterson Extended Care Facility 
were adequate to cover Medicaid-related costs for the audit period, but net payments after 
IGTs were $25 million less than Pattersons total Medicaid operating costs.  Patterson was 
also understaffed during the audit period, which may have affected the quality of care 
provided to its residents.  Patterson officials believed that they could improve quality of care 
if they had more funds.  Pattersons Medicaid operating costs for the period were about $190 
million.  During the same period, Medicaids initial payments to Patterson totaled $348 
million in per diem and enhanced payments.  The State and county required Patterson to 
return about 90 percent of its enhanced payments.  As with the other audits, OIG concluded 
that the Federal Government, in effect, provided almost all of the facilitys Medicaid funding, 
contrary to the Federal/State cost-sharing principle, and the facility, which had been 
identified by the State as having problems with patient care, was under funded.  The amount 
that was returned to the State and county was merged into general revenues and could no 
longer be tracked.  
 
RECOMMENDATIONS TO IMPROVE 
ENHANCED PAYMENTS UNDER UPL RULES 
 
Some recommendations from our audits involving enhanced payments made under UPL 
rules have not yet been implemented.  Following are recommendations that, in combination, 
we believe would curb the inappropriate transactions that inflate the Federal share.   
 
  Use facility-specific limits to cap the amount of enhanced payments that could be sent 
to any one facility.  These limits should be based on the cost of providing services in 
that facility by using the facilitys actual cost reports.  
 
  Require States to allow public providers to retain their enhanced payments to provide 
health care services to Medicaid beneficiaries.   
 
  Declare any Medicaid enhanced payments that are returned to the State by public 
providers to be refunds, with the Federal share of the refund returned to the Federal 
Government.  
 
  States should calculate per diem rates that more closely reflect operating costs.  In the 
States we reviewed, per diem rates were not sufficient to cover costs.   
 
  Perform annual audits of the States enhanced payment calculations to ensure 
compliance with the UPL rules.  We are finding incorrect calculations in some States. 
 
                                                 
4 Report A-02-03-01004. 
__________________________________________________________________________________________ 
 
Senate Committee on Finance   Hearing:  June 28, 2005  Page 6   
 
  Shorten the transition periods included in the final upper payment limit regulation 
since, currently, there are no formal controls to ensure that these added funds are 
actually used for their purported Medicaid purpose.   
 
OTHER USES OF INTERGOVERNMENTAL TRANSFERS 
TO INCREASE THE FEDERAL SHARE OF MEDICAID 
 
The State manipulations of the Medicaid UPL enhanced payments are but a continuation of 
creative financing mechanisms that States began to use extensively starting over 15 years 
ago.  I would like to mention the provider tax and donation programs, disproportionate share 
hospital payments, and some new areas where similar financing schemes are emerging. 
 
Provider Tax and Donation Programs 
 
Several years ago, States used provider tax and donation programs to increase Federal 
Medicaid matching funds while at the same time reducing the use of State resources in the 
Medicaid program.  Subsequent congressional and regulatory action helped curtail the earlier 
problems with provider taxes and donations to a great extent.  The taxation matter has, 
however, continued to be of concern as efforts are made to ensure they are properly 
implemented.  At the request of CMS, our office has begun a new review of the Medicaid 
provider tax programs that are in use today.   
 
In the earlier tax and donation programs, States would either arrange for providers to donate 
funds to the Medicaid program or certain provider groups would be levied special taxes.  
States were allowed by Federal regulations to use these funding sources as the State share of 
Medicaid expenditures.  These collected funds were then repaid to the providers by 
increasing the total Medicaid reimbursement.  As the reimbursements were raised, the 
providers recouped their donations or taxes, and the State could then use the Federal 
matching funds for whatever purpose it decided.  The Omnibus Budget Reconciliation Act of 
1990 affirmed that States were permitted to use provider tax revenues as their share of 
Medicaid expenditures.   
 
In 1990, the then Health Care Financing Administration (HCFA) asked our office to audit the 
taxation and donation programs because of HCFAs concern that the use of such taxes and 
donations had the potential to significantly alter the real rate of the Federal share of Medicaid 
expenditures.  We issued three reports over the next year describing the serious negative 
impact of these practices.  We reported  that the potential increase in the Federal share was 
inestimable and was limited only by the collective ability of institutional providers to 
participate in the programs.  We urged HCFA to propose legislation to close the loopholes.  
In a 1991 Management Advisory Report to HCFA, we stated:  Provider tax and donation 
programs are generally not about increasing services to Medicaid recipients; nor are they 
about improving the quality of care provided to these recipients.  They are, in our opinion, 
carefully crafted financing techniques that allow States to reduce their share of Medicaid 
costs and force the Federal Government to pay significantly more.  We further stated:  
Provider programs differ in some respects, but the Federal Government always loses, and 
States always profit. 
__________________________________________________________________________________________ 
 
Senate Committee on Finance   Hearing:  June 28, 2005  Page 7   
 
 
Disproportionate Share Hospital Payments 
 
Another financial mechanism that can be the source of both benefit and abuse is known as 
the Medicaid disproportionate share hospital program.  Under this program, payments are 
made to financially assist hospitals that provide care to a large number of Medicaid 
beneficiaries and uninsured patients.  These payments are important because public safety 
net hospitals face special circumstances and play critical roles in providing care to 
vulnerable populations.   
 
Our work5 has shown that the States can divert these funds in ways similar to the enhanced 
payments provided under the UPL rules.  Audits in two States show that public hospitals that 
received disproportionate share hospital payments returned large portions (80 to 90 percent) 
of the payments to State Medicaid agencies.  Here is an example: 
 
  During fiscal years 1999 and 2000, a State made disproportionate share hospital 
payments of approximately $738 million to acute care hospitals.   
 
  Approximately $632 million of the $738 million was returned to the State.   
 
  The result was that approximately 86 percent of the total disproportionate share 
hospital payments were returned to the State via an IGT.  
 
Once payments are returned, the States are able to use the funds for any purpose.  We believe 
the return of these funds contradicts the stated purpose of assisting these public safety-net 
hospitals to pay for uncompensated care costs.  In many States, the use of enhanced 
payments under the upper payment limit regulations and the disproportionate share program 
are combined to increase Federal reimbursements.  The financial relationship involves some 
States allowing hospitals to retain upper payment limit funds but requiring the return of 
disproportionate share hospital funds through IGTs.  In other cases, the reverse occurs
hospitals retain disproportionate share hospital funds but return upper payment limit funds.  
 
Just as we recommend for enhanced payments made under the UPL rules, we also believe 
that disproportionate share hospital funds should remain at the hospitals to provide care to 
vulnerable populations, rather than being returned to the States through IGTs.  We believe 
that any Medicaid payment returned by a provider to the State should be treated as a refund 
applicable to the Medicaid program, with a corresponding adjustment to the Federal share. 
 
Disproportionate share hospital payments serve an important purpose in trying to help 
hospitals cover their uncompensated care costs.  But, without States being required to leave 
the funds at the hospitals, there is no assurance that the intended purpose of disproportionate 
share payments is being met. 
                                                 
5  Reviews in Alabama, North Carolina, and California. 
__________________________________________________________________________________________ 
 
Senate Committee on Finance   Hearing:  June 28, 2005  Page 8   
 
New Vulnerabilities Are Being Identified  
 
We foresee the possibility that all types of public Medicaid providers could be used by States 
to maximize Federal revenues, circumventing the statutory Federal/State sharing formulas.  
We are finding other Medicaid program areas where States are manipulating Federal 
financing sources with little regard for program accountability.  
 
State-employed Physicians and Hospital Graduate Medical Education Payments.   
 
Both State-employed physicians and hospital graduate medical education providers could be 
paid an enhanced payment that could serve as a mechanism for inflating the Federal share of 
payments for Medicaid services above the statutory Federal matching percentage.  The 
additional payment amount made to public providers could then be returned to the State by 
the provider with the effect similar to what we have observed in the UPL enhanced payment 
process at hospitals and nursing homes.  
  
Medicaid School-based Health Services 
 
Another vulnerability we have noted concerns Medicaid school based health services.  States 
are permitted to use their Medicaid programs to help pay for certain health care services 
delivered to children in schools, such as physical and speech therapy services.  Schools may 
also receive Medicaid reimbursement for the costs of administrative activities, such as 
Medicaid outreach activities, application assistance, and coordination and monitoring of 
health services.   
 
We have identified instances6 in which States take back funds from the school districts as 
part of the contractual arrangements or require the districts to return a portion of the 
Medicaid payment to the State through intergovernmental transfers, thus reducing the States 
share of the original payment and possibly resulting in a net gain for the State. 
 
Although not the subject of this hearing, we have found numerous errors in billings for 
Medicaid services to children by school districts.  In many instances, OIG found that school 
districts billed their States for services that were not supported by documentation, were 
medically unnecessary, coded incorrectly, or were not covered by the program.  In some 
cases, the school districts billed for services allegedly performed on days the children were 
not in school.  There were also errors in related administrative costs.  CMS has begun to 
recover from some of the States the Federal share of the payments OIG questioned.   
Most recently, we released a report of our review of Medicaid speech claims made by the 
New York City Department of Education.7  Our objective was to determine whether Federal 
Medicaid payments for speech services claimed by New York City Department of Education 
were in compliance with Federal and State requirements.  Eighty-six of 100 speech claims in 
our sample did not comply with requirements and 68 of the sampled claims contained more 
                                                 
6  Reviews in Washington, Oregon, and New York. 
7  Report A-02-02-01029. 
__________________________________________________________________________________________ 
 
Senate Committee on Finance   Hearing:  June 28, 2005  Page 9   
 
than 1 deficiency.  As a result, we estimate that the State improperly claimed $435,903,456 
in Federal Medicaid funding during our audit period.  
BILLING CONSULTANTS 
 
The use of consultants on a contingency fee basis has become a major influence in helping 
States to maximize their Medicaid revenue from the Federal government.  Although there is 
nothing wrong with States obtaining such consultant help, it is important that States maintain 
vigilance over the consultant work to ensure the accuracy of the outcomes.  We have noted 
that selected States have incorrectly billed CMS for claims developed by consultants and for 
the fees paid to these consultant firms.   
 
In the State of New Jersey, we found that over $22 million in improper Medicaid claims 
(Federal share of over $11 million) were submitted for prison inmates inpatient and 
outpatient health care costs under the Medicaid disproportionate share hospital program.  The 
New Jersey State plan explicitly excluded any Federal funding for the cost of health services 
provided to prison inmates, and an August 16, 2002, policy clarification by CMS further 
prohibited Federal disproportionate share reimbursement for prison inmate costs.  We found 
that the State agency relied solely on a consultants work to prepare claims and, contrary to 
Federal requirements, failed to ensure the veracity of the claims before submitting them for 
Federal reimbursement. 
 
The problem in New Jersey was not limited to the prison inmate reimbursement issues noted 
above.  For a 4-year period ending June 30, 2001, this same consultant erroneously 
duplicated almost $55 million ( Federal share over $27 million) in disproportionate share 
acute care hospital claims that the State submitted to CMS for reimbursement without 
validating the dollar value.  The duplication error by the consultant occurred because their 
computer system had an error.  But the major problem was that the State agency relied solely 
on the consultants work to prepare and document the additional disproportionate share acute 
care hospital claims without validating the consultants work. 
 
We have also noted instances in which States have claimed unallowable contingency fee 
payments made to consulting firms for providing Federal revenue maximization services.  
Such findings were noted in both Virginia and Colorado.  Such payments are not allowable 
for Medicaid reimbursement because the amounts were contingent upon the recovery of costs 
from the Federal Government, which does not comply with the requirements of Office of 
Management and Budget Circular A-87.   
 
ACCOUNTABILITY OF MEDICAID FUNDS 
 
As I mentioned at the beginning of this testimony, the financing mechanisms that are 
designed to circumvent Federal and State cost-sharing principles serve to disguise the source 
and final use of both Federal and State funds.  Such manipulation undermines the ability of 
Congress and the Department to exercise responsible stewardship of Federal funds and 
distorts efforts to measure and estimate the true Federal cost of the Medicaid program. 
 
__________________________________________________________________________________________ 
 
Senate Committee on Finance   Hearing:  June 28, 2005  Page 10   
 
The problems I have described in this statement are just one side of the coin.  Not only does 
the Federal Government pay more than its statutory share of Medicaid because of States 
financial manipulations, the Federal Government pays too much for Medicaid as a result of 
less than optimum State management of other aspects of the program as well.   
 
For example, the Inspector General mentioned a problem with third-party liability claims.  
Medicaid is supposed to be the payer of last resort.  When States pay a claim that should 
have been paid by another program or insurer, the States have not had great success in 
recouping those funds.  Yet, instead of focusing on cost avoidance, many States pursue a 
payand-chase method of dealing with third-party liability.  I am raising these examples here 
because, when a State pays more for a benefit than it should or pays a claim that some other 
program or insurer should be paying, not only does the State waste its own tax dollars, the 
Federal share of that improper payment may be lost as well. 
 
We are in the process of conducting a series of audits of States accounts receivable systems 
for Medicaid provider overpayments to determine whether the States reported overpayments 
to the Federal Government as required.  The Social Security Act requires CMS to adjust 
reimbursements to a State for any overpayment or underpayment and generally requires 
States to report overpayment adjustments within 60 days from the date of discovery.  In the 
few States reviewed so far, we have identified millions of dollars in provider overpayments 
for which the States failed to follow reporting rules.  Therefore, there were no corresponding 
adjustments to restore the Federal share of those overpayments.      
 
Effective use of State and Federal Medicaid funds depends on the consistent application of 
the following widely-accepted accountability principles.  Our studies raise serious concerns 
that some or all of these aspects of accountability are lacking in many State Medicaid 
programs. 
 
  There should be assurance that the funds paid are actually used for the intended 
purposes.  For example, if disproportionate share payments are made, they must be 
used to reimburse hospitals for their uncompensated care costs. 
 
  The financial oversight structure should be adequate to ensure that Medicaid funds 
are paid only for health care services and products that are appropriate and necessary.   
 
  Within the State, there should be a clear trail of responsibility concerning who is 
accountable for the proper expenditure of Medicaid funds.   
 
  The State Medicaid agency must ensure that quality and timely health care services 
are being delivered to properly eligible beneficiaries.   
 
CONCLUSION 
 
Our overarching concern is to ensure that Federal matching payments are in proper 
proportion to States shares and that the funds are used to provide the intended health care 
services, in the intended facility, to the intended beneficiaries.  Changes are needed to resolve 
__________________________________________________________________________________________ 
 
Senate Committee on Finance   Hearing:  June 28, 2005  Page 11   
 
some of the more obvious shortcomings of the Medicaid program that are the subject of this 
hearing.  This concludes my testimony, and I welcome your questions. 
 
__________________________________________________________________________________________ 
 
Senate Committee on Finance   Hearing:  June 28, 2005  Page 12