:/.~~s~ DEPARTMENT OF HEALTH &. HUMAN SERVICES

\ :;l
Office of Inspector General
..+.l.t 
.ll'...no 
Washington, D.C. 20201

SEP 2 5 2006

TO:	 Mark B. McClellan, M.D., Ph.D.

Administrator

Centers for Medicare & Medicaid Services

FROM:	 Daniel R. Levinson ~ lJ ~

Inspector General

SUBJECT:	 Ernst & Young Final Report: "Review of the Centers for Medicare &

Medicaid Services' Medicaid Financial Management Oversight"

Attached is a final report by contractors Ernst & Y Qung (E& Y) regarding financial 
management of  the Medicaid program. Under a contract with the Offce of 	 Inspector
General, E& Y conducted this review to provide recommendations for improving the 
financial management of the Medicaid program. 
To accomplish the objectives, E&Y reviewed the current Centers for Medicare & 
Medicaid Services management structure, examined prior studies and audits, compared 
the financial management structues and activities of Medicare to those of Medicaid, held 
discussions with various stakeholders, and analyzed the issues identified through these 
activities. The E& Y report contains a series of findings, conclusions, and 
recommendations. 
If you have any questions or comments about this report, please do not hesitate to call 
me, or your staff may contact Judy Holtz, Acting Director of  External Affairs, at 
(202) 619-0260 or through e-mail at (Judy.Holtz(goig.hhs.gov). To facilitate 
identification, please refer to the report title in all correspondence. 
Attachment 
cc: Barry Clendenin 
Offce of Management and Budget 
Christine Jones

Office of the Assistant Secretary for Resources and Technology
 REVIEW OF 
the Centers for Medicare & Medicaid Services 
Medicaid Financial Management Oversight   !@# 
r Ernst & Young LLP  r Phone:  (202) 327-6000 
1225 Connecticut Avenue, N.W.  www.ey.com 
Washington, D.C. 20036 
To the Inspector General of the 
Department of Health and Human Services and  
the Administrator of the Centers for Medicare & Medicaid Services 
In  connection  with  our  audits  of  the  Health  Programs  within  the  Centers  for  Medicare  & 
Medicaid Services (CMS) for the years ended September 30, 2005 and 2004, we were engaged 
by  the  Office  of  Inspector  General  to  perform  certain  additional  procedures  to  assess  the 
financial management activities of the Health Programs.  The purpose of these procedures was to 
review CMS current financial management oversight of the Medicaid program in regard to its 
organization and administration and provide recommendations for improving future oversight 
functions and/or processes that would strengthen the financial management of the Medicaid 
program.   
We  conducted  our  procedures  in  accordance  with  the  performance  audit  requirements  of 
generally accepted Government Auditing Standards.  Our procedures involved the following: 
(1)reviewing  the  current  management  structure,  (2)  examining  prior  studies  and  audits, 
(3)comparing Medicare to Medicaid, (4) holding discussions with various stakeholders, and 
(5)analyzing  issues  or  lack  of  corrective  action  identified  through  the  above  mentioned 
activities, to the extent possible, which may or may not be linked to deficiencies in CMS 
organization and administration of Medicaid financial management. 
This report contains various findings, conclusions, and recommendations for the improvement of 
the internal control structure of Medicaid financial management and oversight activities. 
We would be pleased to discuss the contents of the report or to respond to any questions at your 
convenience. 
August 30, 2006 

Washington, DC 

A Member Practice of Ernst & Young Global  Centers for Medicare & Medicaid Services 

Medicaid Financial Management 

Table of Contents 

PAGE 
SECTION  NUMBER 
	 Results in Brief  1 

	 Background  3 

	 Objectives, Scope and Methodology  6 

	 Comparisons of Medicaid to Medicare to Identify Differences In Program  9 

Oversight 

	 Progress Noted on Corrective Actions; However Further Enhancements  12 

Are Needed 

	 Organizational Structure Creates Challenges  15 

	 Payment Error Rate Measurement Development and Implementation Still  17 

in Process 

	 State Oversight and Single Audit Primary Test for Eligibility and Program  19 

Compliance

	 Recommendations for Executive Action  19 

	 Agency Comments and Our Evaluations  21 

	 Acronyms  22 

	 Other Related Products  23 

Appendix A:  Status of Corrective Actions 
Appendix B: Centers for Medicare & Medicaid Services Written Response  RESULTS IN BRIEF 
As early as the 1990s, the Government Accountability Office (GAO) and other auditors have 
identified weaknesses in the administration and oversight of Medicaid activities.  The Medicaid 
program, administered by Centers for Medicare & Medicaid Services (CMS), in partnership with 
State Medicaid offices,1 is a complex program that has expanded since 1998 by more than 86% 
or to $182 billion in net Federal costs in fiscal year 2005.  Over the past five years, CMS has 
received additional funding and undertaken a series of initiatives to enhance and focus its 
financial management and oversight of the Medicaid program.  Many of these initiatives are a 
result of legislative directives allowing for more resources and changes in program policies. 
Although many of these directives were not fully implemented at the time of our review, which 
took place principally from January through May 2005, progress has been identified.  Continued 
focus and development of strategies by senior level executives will be required to ensure that 
appropriate actions are completed. 
The weaknesses identified in our review of prior reports consisted largely of (1) organizational 
structure limitations that impact CMS headquarter and regional office oversight, (2) insufficient 
program integrity programs, including an estimate of improper payments, (3) insufficient follow-
up of eligibility determination deficiencies cited in single audit2 reports, and (4) need for clear 
cut guidelines for approving and reviewing waivers and state plan amendments.  We have 
obtained information on the status of recommendations made in the prior audits and studies we 
reviewed.  These  recommendations  address  ways  CMS  could  define  lines  of  authority  or 
restructure its organization, the need to continue to develop strategies in implementing new 
directives and allocating resources, and the continued need to improve internal control over 
certain aspects of administration and oversight within the Medicaid program.    
CMS organizational structure creates challenges in effectively administering and overseeing 
Medicaid activities.   We noted two areasregional office resources and the lack of a separate, 
dedicated Chief Financial Officer (CFO) within the Office of Centers for Medicaid and State 
Operations (CMSO)where discussions with certain CMS personnel indicated concern that the 
organizational  structure  for  Medicaid  activities  was  not  designed  appropriately  or  lines  of 
authority are unclear.  CMSs 10 regional offices are the Federal governments frontline for 
overseeing state Medicaid financial operations and expenditures.   Because Medicaid is a state 
administered program the personnel in the regional offices act as liaisons between CMSO and 
states regarding Medicaid financial activities.  The accountability of these personnel to the 
CMSO merits further focus.  Resource allocation decisions made within the regional offices can 
weaken  CMS  ability  to  ensure  appropriate  oversight  of  the  Medicaid  activities.    Further, 
1 For purposes of this report, States represent states, territories and the District of Columbia Medicaid Program offices. 
2 OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations was issued pursuant to the Single Audit Act of 1984 
and the Single Audit Act Amendments of 1996.  Under the Act, annually, each states Medicaid program is required to be audited. The Circular 
was established to provide reasonable assurance that Federal financial assistance programs are managed in accordance with applicable laws and 
regulations. These audits are conducted by independent public accountants or state auditors.  The results of these audits are provided to the state 
and CMS.  In addition to assessing whether CMS oversight should be changed based on the findings, the CMS is responsible for following up 
with the state to ensure that the state takes appropriate action to correct deficiencies identified from the audit. 
Page 1  although the Medicaid program is one of the Federal Governments largest programssoon to 
reach $200 billion in Federal outlays, a separate, dedicated CFO or an independent executive to 
oversee financial activities has not been created.  Currently, financial management oversight is 
primarily taking place within the CMSO with bookkeeping responsibilities and certain program 
integrity activities taking place within the CMS Office of Financial Management (OFM).  Our 
discussions found varying opinions as to whether Medicaid needed a CFO.  Stakeholders views 
noted potential benefits of perceived increased independence and transparency into decision 
making while raising concerns about the specialized expertise needed to effectively implement a 
separate CFO function and possible diffusion of accountability. 
Our review also noted that a primary tool that CMS utilizes in testing the states quality control 
systems  over  determination  of  eligibility  and  verifying  compliance  with  program  laws  and 
regulations is the states single audits.  During FY 2005, we noted during our audit of the 
Medicaid program that over 10% of the states received disclaimed opinions or qualified reports 
by independent auditors on compliance with Medicaid program requirementsthe majority of 
these  disclaimed  opinions  or  qualifications  were  a  result  of  noncompliance  with  eligibility 
requirements.  There is limited follow-up on corrective action plans surrounding the single audits 
by both the states and CMS. It was unclear how, if at all, single audit findings or disclaimed 
opinions  had  been  considered  in  the  CMS  Medicaid  program  oversight.    Our  discussions 
indicated that CMS should expand its role in its oversight of the states assessment of eligibility. 
Because statutory eligibility determination was assigned to the states, the stakeholders believed 
that CMS role should be in overseeing the implementation of quality control systems at the 
states to reduce errors in eligibility determination.  Subsequent to our fieldwork, CMS noted that 
increased focus on resolution of external audits was being implemented.   
Recent  initiatives  to  provide  an  additional  100  personnel  focused  on  Medicaid  financial 
management, and just enacted legislation to add a further 100 personnel and additional financial 
resources focused on program integrity, are significant steps that can dramatically enhance the 
role the Federal government plays in managing the Federal and state partnership for Medicaid. 
Factors  for  CMS  to  consider  as  it  develops  its  plans  to  deploy  resources  include  placing 
additional focus on how such resources are deployed and utilized, efforts to provide transparency 
in how state plan amendments, waivers, and routine Federal oversight activities are conducted 
with visibility into outcomes across states to the extent practical, and/or potentially introducing 
financial  management  oversight  through  a  CFO  organization  independent  of  program 
administration activities. 
During June 2006, the GAO issued its report, MEDICAID FINANCIAL MANAGEMENT:  Steps 
Taken to Improve Federal Oversight but Other Actions Needed to Sustain Efforts (GAO-06-705) 
which discusses the status of Medicaid financial management oversight and the actions CMS has 
taken  to  address  certain  concerns  identified  in  its  previous  reports.    GAOs  review  was 
performed under different timeframes, and actions taken subsequent to the end of fieldwork may 
not be included in this report. 
Page 2  BACKGROUND 
The Medicaid program, established in 1965, by Title XIX of the Social Security Act, provides 
grants to states for health and long-term care coverage to low income Americans including 
children, the elderly, and the disabled.  Medicaid is the largest source of funding for medical and 
health-related services for people with limited income.  During FY 2005, the average enrollment 
for the Medicaid program was 44.7 million Americans at a net cost of approximately $182.2 
billion. 
CMS is the Federal agency responsible for administration and oversight of the Medicaid program 
and is responsible for ensuring that State Medicaid programs meet all Federal requirements. 
Staff members in CMS central office in Baltimore, Maryland and in 10 regional offices across 
the country are responsible for the financial oversight of the Medicaid program.  Both the Office 
of Financial Management (OFM) and the CMSO play a role in this oversight and administration 
of Medicaid activities, as do many other entities as discussed below.   
Entity  Responsibility 
Centers for Medicaid and State    Processes  and  recommends  approval  of  waivers  and  state  plan 
Operations (CMSO)  amendments. 
  Develops, interprets, and applies specific laws, regulations, and policies 
that  directly  govern  the  financial  operation  and  management  of  the 
Medicaid program. 
  Acts as the focal point for all agency interactions with states. 
  Develops national Medicaid policies and procedures that support and 
assure effective program administration. 
  Develops  in  consultation  with  the  states,  and  tests  new  methods  to 
improve the Medicaid programs through best practices. 
  Monitors program integrity efforts and activities performed by states. 
Centers  for  Medicare  &    Acts as a liaison between CSMO and states. 
Medicaid  Services  (CMS)    Reviews the state budget and expenditure submissions and preparation 
Regional Offices  of the regional decision report based on the submissions from the states. 
  Supports CSMO on program integrity efforts. 
Centers  for  Medicare  &    Records disbursement and accrual  based financial activity related to 
Medicaid  Services  Office  of  Medicaid to financial systems. 
Financial  Management  (CMS    Oversees  the  Medicaid  Payment  Error  Rate  Measurement  Programs 
OFM  process (PERM). 
  Performs  financial  reconciliation  and  financial  analyses  processes  of 
Medicaid activities. 
  Responsible for all CMS disbursements including the issuance of state 
Medicaid grants. 
Department of Health and    Oversees annual CFO financial audit of Medicaid activities. 
Human Services (DHHS)    Performs program and financial audits. 
Office of Inspector General    Tracks open recommendations. 
(OIG) 
  Tracks single audit reporting from states. 
Page 3  Entity  Responsibility 
Department of Health and    Provides grant payments to the states and cash management services for 
Human Services  Division of  CMS. 
Payment Management (DPM)    Oversees the states quarterly reporting of fund draws and available 
obligations. 
State Medicaid Offices    Administers the Medicaid program to local beneficiaries. 
  Determines  eligibility  of  participants  (frequently  at  the  local 
government). 
  Pays the providers for Medicaid services. 
  Ensures proper payment and recovery of funds paid for unallowable 
claims. 
  Responsible  for  investigating  and  ensuring  prosecution  of  Medicaid 
fraud. 
  In  some  cases,  voluntarily  obtains  SAS  703  reports  on  controls  on 
Medicaid financial management systems. 
State Auditors and    Performs/oversees state single audits. 
Independent Public    Performs state audits and reviews. 
Accountants 
Medicaid is financed through a partnership between the Federal government and states.  States 
are required to submit to CMS a comprehensive written plan that describes the nature and scope 
of its program.  If the state plan meets Federal requirements, the Federal government matches 
state  expenditures  on  Medicaid  based  on  a  statutorily  defined  formula  called  the  Federal 
Matching Assistance Percentage (FMAP).  This matching rate varies by state and is currently 
between 50 and 77 percent.  These payments are processed by the DHHS Division of Payment 
Management (DPM).  There is no limit or cap to the amount of state expenditures the Federal 
government will match, except with respect to the disproportionate share programs and payments 
to territories.  The process states use to fund their share can include provider taxes and other 
mechanisms that have been assessed in some cases as abusive. 
At the Federal level, the CMSO in conjunction with the regional offices and the OFM have 
responsibilities  in  the  oversight  of  the  Medicaid  program.    The  CMSO  is  responsible  for 
approving state Medicaid plans, working with the states on program integrity exclusive of the 
PERM, awarding grants, and budgeting.  Many management oversight activities for Medicaid 
are taking place within CMSO with the Director of CMSO functioning as the Medicaid CFO. 
Currently, the CMS CFO, located in OFM, also functions as a CFO for Medicare.  The OFM is 
responsible for the issuance of the cash disbursements for the grants that have been awarded by 
CMSO, oversight of the PERM, and the performance of financial reconciliations and analyses. 
The  ROs  are  responsible  for  overseeing  state  financial  management  and  internal  controls, 
3 CMS, and in some cases the states are contracting with Independent Public Accountants to perform a Statement of 
Auditing Standards No. 70, Reports on the Processing of Transactions by Service Organizations (SAS 70) reports.  
These reports provide for a service organization's description of its controls that may be relevant to a client's internal 
control, on whether such controls had been placed in operation as of a specific date on whether they are suitably 
designed to achieve specified control objectives and on whether the controls that were tested were operating with 
sufficient effectiveness to provide reasonable, but not absolute, assurance that the related control objectives were 
achieved during the period specified. 
Page 4  ensuring the reasonableness of budgets reported to estimate Federal funding requirements, and 
ensuring the propriety of expenditures reported for Federal matching. 
Key activities performed in CMS ROs include reviewing state budget estimates and expenditure 
reports, preparing decision reports that document approvals for Federal reimbursements and 
reimbursement deferral actions, providing technical assistance to the states, and serving as a 
liaison to the state and audit entities. The CMS Regional Administrators report to the CMS 
Administrator.  CMSO relies on regional decision reports to help determine state grant awards. 
The OFM is responsible for all CMS disbursements including the issuance of disbursements for 
state Medicaid grants.  Reviews of the Medicaid expenditure reports are the primary oversight 
control activities performed by regional financial analysts.  These reviews are used to determine 
if Medicaid expenditures are complete, properly supported by the states accounting records, 
claimed at appropriate Federal matching rates, and allowable in accordance with existing Federal 
laws.  Regional  analysts  are  expected  to  obtain  knowledge  about  each  states  financial 
management  and  internal  control  to  aid  in  assessing  the  expenditures  reported  for  Federal 
reimbursement.  Although the regional financial analysts maintain an integral role as they are 
responsible for performing frontline activities to oversee state financial management activities, 
personnel do not report to CMSO, but instead to the CMS Regional Administrators, who report 
to the CMS Administrator. 
In accordance with Federal guidelines, each state has latitude to design their individual Medicaid 
programs with respect to administrative structure, eligibility, services and payment.  Each state is 
also  responsible  for  establishing  an  adequate  internal  control  to  ensure  that  the  Medicaid 
program is managed effectively and efficiently within the Federal requirements.  Quarterly, 
states submit various Federal reporting forms through the Medicaid Budget and Expenditure 
system (MBES) that provide regional analysts with the budget and expenditure data to execute 
their financial management and oversight responsibilities.   
Annually, each states Medicaid program is required to be audited under Office of Management 
and  Budget  (OMB)  Circular  A-133,  Audits  of  States,  Local  Governments,  and  Non-Profit 
Organizations.  The  Circular  was  established  to  provide  reasonable  assurance  that  Federal 
financial assistance programs are managed in accordance with applicable laws and regulations. 
These audits are conducted by independent public accountants or state auditors.  The results of 
these audits are provided to the state and CMS.  The CMS is responsible for following up with 
the state to ensure that the state takes appropriate action to correct deficiencies identified from 
the audit. 
In FY 2004, CMS was provided funding to hire 100 additional full time equivalent (FTE) 
funding specialists to support its oversight of Medicaid activities.  Specifically, CMS tasked 
the funding specialists to monitor state budget-making processes, examine quarterly funding 
requests and work with states to ensure that the administration of Medicaid activities within the 
state meet Federal requirements.  These individuals, although mostly located in the states and 
regions, report directly to CMSO.  During FY 2005, the new FTEs were sent to extensive 
training to understand their new job requirements.   In FY 2006, an additional 100 FTEs, and 
additional funding, were provided by the Deficit Reduction Act (DRA) to support Medicaid 
program integrity activities.  These resources are in the process of being deployed.  Finally, in 
FY 2006, the Payment Error Rate Measurement Program (PERM) is being implemented.   Under 
Page 5  the PERM, Medicaid has 3 components  a fee-for-service error rate, an eligibility error rate, and 
a managed care error rate.  A national contractor will calculate the Medicaid fee-for-service and 
managed care error rates for each state once every 3 years or 17 states each year.  The states will 
conduct an eligibility review once every 3 years and submit the results to CMS for calculation of 
the states eligibility error rate.  The PERM is to be published as an interim final rule at the end of 
August 2006. 
OBJECTIVES, SCOPE AND METHODOLOGIES 
The purpose of this project was to review CMSs current financial management oversight of the 
Medicaid program in regard to its organization and administration and provide recommendations 
for improving future oversight functions and/or processes that would strengthen the financial 
management  of  the  Medicaid  program.  We  accomplished  this  project  by  performing  the 
following:  (1) reviewing the current management structure, (2) examining prior studies and 
audits, (3) comparing Medicare to Medicaid, (4) holding discussions with various stakeholders, 
and (5) analyzing  issues or lack of corrective action identified through the above mentioned 
activities, to the extent possible, which may or may not be linked to deficiencies in CMS 
organization and administration of Medicaid financial management. For the purpose of defining 
the scope of this project, we considered GAOs definition of Medicaid financial activities. 
GAOs  February  2002  report,  Medicaid  Financial  Management:  Better  Oversight  of  State 
Claims for Federal Reimbursement Needed, defines Medicaid financial activities as follows: 
The internal control structure and financial oversight process that CMS has designed for 
Medicaid includes activities for: 
	 approving and awarding grants to make funds available to the States for the efficient 
operation of the Medicaid program; 
	 overseeing State financial management and internal control processes; 
	 ensuring  the  reasonableness  of  budgets  reported  to  estimate  Federal  funding 
requirements; 
	 ensuring the propriety of expenditures reported for Federal matching funds. 
During our assessment we did not consider processes within the states or processes related to 
identifying funding mechanisms, except insofar as they related to understanding the need for 
Federal oversight resources, as they were excluded from the scope of this engagement.  We did, 
however, consider additional program controls that are currently under development such as the 
Medicaid and State Childrens Health Insurance Program (SCHIP) PERM; Medicare/Medicaid 
data matches; automated reporting systems and recently added Federal resources devoted to 
Medicaid financial management and program integration. 
Specific tasks included: 
	 To develop and document a thorough description of CMS current financial management 
oversight activities of the Medicaid program, we worked with the management of CMS 
and other selected oversight entities to obtain an understanding of the processes and gain 
Page 6  concurrence from management as to the accuracy of our documentation.  Specific steps 
performed included: 
o	 We met with personnel from the CMSO, OFM, OIG, two regional offices including 
New York and Pennsylvania, and two funding specialists from Washington, D.C. and 
Maryland and obtained an understanding of the Medicaid process.  Additionally, we 
met with individuals from the states of Maryland and New York Medicaid office to 
obtain an overview of state Medicaid activities.   
o	 We reviewed prior year audit work papers and met with personnel involved in fraud 
and abuse activities, MMIS, MSIS, and the PERM.   
o	 We obtained and reviewed CMS manuals and training guides related to Medicaid 
activities. 
o	 We reviewed a complete list of all Medicaid budget, expenditure, and accounting 
reports that states are required to submit based on related legislation, regulation, State 
Medicaid Manual instruction, or CMS directive.  We reviewed the State Medicaid 
Manuals to compile a list of reports submitted by the states.   
o	 We received a list of the total Federal dollars spent on financial management, Health 
Care Fraud and Abuse (HCFAC), Medicaid Fraud Control Units, Federal match of 
state and local administration, PERM project, etc., for the most current reporting 
period. 
o	 We obtained and reviewed a complete listing of all Federal electronic databases and 
information technology (IT) systems that are used in the financial management and 
program integrity of the Medicaid program. 
o	 We  obtained  a  detailed  organizational  chart  of  all  central  and  regional  offices 
divisions/groups/defined  teams  working  in  CMS  that  have  a  significant  role  in 
Medicaid financial management and program integrity.  This organizational chart 
identified the lines of reporting between the central office and the regional offices 
with respect to financial management and program integrity.   
o	 Based on information received, we prepared a thorough description of all current and 
upcoming Medicaid financial management activities, including process flowcharts of 
a typical Medicaid claim transaction, including the reporting process, the information 
systems and databases used, documents, and CMS personnel involvement. 
	 We obtained documentation and made certain comparisons between the Medicare and 
Medicaid financial management and oversight processes. 
	 We performed a literature search of GAO and OIG reports and other selected sources to 
aid in identifying issues regarding vulnerabilities of the Medicaid program and related 
such information, as appropriate, to potential gaps in oversight structures.  We met with 
CMS personnel to discuss the status of corrective actions and determined which issues 
still existed. 
	 Under the initial task order, we were requested to facilitate a one-day meeting with CMS 
management, OIG and other selected stakeholders to validate the oversight structures 
identified  and  aid  in  validating  gaps  identified  in  prior  phases  of  the  work  and  in 
identifying  gaps  and/or  potential  areas  for  improvement  based  on  input  from  the 
attendees. Our task order was subsequently amended on September 15, 2005 to cancel the 
one-day meeting and instead hold separate discussions with Federal senior management 
Page 7  personnel responsible for various activities of Medicaid financial management that were 
made available to us from CMS/CMSO, CMS/OFM, ASRT (formerly ASBTF), OMB, 
GAO  and  OIG  (hereafter  referred  to  as  stakeholders).    The  discussions  primarily 
addressed the following questions. 
o	 What are the primary differences between CMSs current financial management of 
the Medicaid and Medicare programs?  What improvements could CMS realize by 
applying some aspects of the Medicare approach to Medicaid financial management? 
o	 What  previously  published  GAO,  OIG  and  audit  findings,  conclusions  and 
recommendations  continue  to  present  the  greatest  risk  to  Medicaid  financial 
management,  either  because  the  recommendations  have  yet  to  be  addressed  or 
corrective action has not fully addressed the basis of the recommendation?  What 
actions has CMS taken to date regarding these issues? 
o	 What, if any, vulnerabilities exist related to CMS current organizational structure of 
Medicaid  financial  management?    How  does  dissemination  of  financial  review 
responsibilities to regional offices affect CMS oversight?  Are lines of reporting for 
financial specialists clear?  Should CMS create a separate Medicaid CFO? 
o	 What progress has CMS made to date toward creating and publishing PERM in the 
Medicaid program?  Once the PERM implementation is completed, how will the 
resulting measures be used to improve Medicaid program integrity?  What additional 
activities are needed to generate comparable data useful for program oversight? 
o	 What financial management activities are currently in place at the Federal level 
regarding eligibility determinations?  Are Federally mandated requirements regarding 
eligibility determinations at the state/local level sufficient?  What additional activities 
could the Federal government take to improve eligibility controls (such as assisting 
program participants with best practices or increasing standardization of eligibility 
determinations)? 
	 Based on our discussions, we analyzed those problems identified by the stakeholders and 
linked them, as appropriate to potential gaps in CMSs organization and administration of 
Medicaid financial management.  
We performed our principal fieldwork from January 2005 through May 2005, at the CMS central 
office in Baltimore, Maryland, DHHS headquarters, the two regional offices and the two states, 
mentioned above.  Through March of 2006, we conducted the separate discussions referenced 
above to document Medicaid financial management and oversight activities and to gain a status 
of corrective actions identified in previous GAO and OIG reports and to gain their perspectives 
on areas for improvement and potential solutions. 
During June 2006, the GAO issued its report, MEDICAID FINANCIAL MANAGEMENT:  Steps 
Taken to Improve Federal Oversight but Other Actions Needed to Sustain Efforts (GAO-06-705) 
which discusses the status of Medicaid financial management oversight and the actions CMS has 
taken  to  address  certain  concerns  identified  in  its  previous  reports.    GAOs  review  was 
performed under different timeframes, and actions taken subsequent to our end of fieldwork may 
not be included in this report. 
Page 8  COMPARISONS OF MEDICAID TO MEDICARE TO IDENTIFY DIFFERENCES IN 
PROGRAM OVERSIGHT 
The CMS, one of the largest purchasers of health care, had outlays of more than $484 billion 
during FY 2005.  The majority of these outlays related to CMS administering of the Medicare 
and Medicaid programs.  The CMS is responsible for establishing policies for program eligibility 
and benefit coverage processes for over one billion Medicare claims annually, providing states 
with funds for Medicaid/SCHIP, and safeguarding funds from waste, fraud and abuse.  As part of 
this  engagement,  we  were  asked  to  perform  a  comparison  of  the  Medicare  and  Medicaid 
programs.   
The Medicare program, established in 1965, was legislated as a complement to Social Security 
retirement, survivors, and disability benefits, and originally covered people aged 65 and over.  In 
1972, the program was expanded to cover disabled and people with end-stage renal disease.  The 
Medicare program processes over one billion fee-for-service claims a year incurring costs of 
over $300 billion a year for approximately 42 million beneficiaries.  In the past several years, 
with the implementation of the Medicare drug plans and other new programs, Medicare costs 
have  continued  to  rise.  Medicare  contractors  administer  the  day-to-day  operations  of  the 
Medicare  program  by  paying  claims,  auditing  provider  cost  reports,  and  establishing  and 
collecting overpayments.  CMS is responsible for establishing an adequate internal control to 
ensure that the Medicare program is managed effectively and efficiently within the Federal 
requirements.    It  establishes  nationwide  coverage  rules  and  disseminates  these  rules  to  the 
contractors. The administration and oversight of financial activities is primarily the responsibility 
of  the  CMS  headquartersthe  OFMand  the  regional  offices.  Additionally,  CMS  uses 
independent certified public accountants to review Medicare contractor financial balances and 
financial systems in order to validate the adequacy and consistency of internal controls.  On a 
monthly basis, Medicare contractors perform a reconciliation of their Form CMS 1522 Funds 
Expended  Reports  to  their  paid  claims  or  system  reports.    In  FY  2004,  CMS  initiated  its 
implementation of the Healthcare Integrated General Ledger Accounting System (HIGLAS), its 
new program-wide financial management system, at the contractor locations. 
The Medicaid program, on the other hand, is a health care program for low-income and disabled 
Americans,  administered  by  CMS  in  partnership  with  the  states.    In  FY  2005,  there  were 
approximately 44.7 million individuals participating in the Medicaid program incurring Federal 
costs of approximately $182 billion.  The CMS provides matching payments to the states and 
territories to cover the Medicaid program and related costs.  State medical payments are matched 
according to a formula that uses as a starting point each states per capita income.  Under Federal 
legislation, states set eligibility, coverage, and payment standards.  State governments have a 
great  deal  of  flexibility  to  tailor  their  individual  Medicaid  programs  to  their  individual 
circumstances and priorities. Accordingly, there is a wide variation in the services offered by the 
state.  Each state is responsible for establishing an adequate internal control to ensure that the 
Medicaid  program  is  managed  effectively  and  efficiently  within  the  Federal  requirements. 
Quarterly,  states  submit  various  Federal  reporting  forms  through  the  Medicaid  Budget  and 
Expenditure system (MBES) that provide regional analysts with budget and expenditure data to 
execute their financial management and oversight responsibilities.  In addition, annually each 
states  Medicaid  program  is  audited  under  OMB  Circular  A-133,  Audits  of  States,  Local 
Governments, and Non-Profit Organizations.  In general the results of these audits are provided 
Page 9  to the state and made available to the responsible Federal agencies which awarded the grants.  In 
addition to administering a broad framework of the program under Federal legislation and 
regulations, CMS primary roles in the Medicaid program are paying  matching funds to the 
states and ensuring that the states conform to Federal requirements.  Additionally, CMS is 
responsible for following up with the state to ensure that the state takes appropriate action to 
correct deficiencies identified from the single audits.   
In our comparison of Medicaid to Medicare, we reviewed three components: the organizational 
structure, the program integrity activities, and the role of the intermediary versus the states. 
Primary differences for each component are as follows: 
Organizational Structurethe organizational structures for the programs were similar in the 
sense  that  both  utilize  headquarters  and  regional  office  personnel  to  oversee  the  program. 
Differences noted are as follows: 
	 Although the organizational structure identifies the activities of a CFO for the Medicaid 
function  as  falling  under  the  responsibilities  of  the  Director  of  CMSO,  significant 
financial activities are taking place in the ROs.   The personnel in the ROs report to 
Regional  Administrators,  who  further  report  to  the  CMS  Administrator.  Certain 
processing functions and the newly developed PERM responsibilities are taking place 
within the CMS CFO office located in the OFM.  Beginning in September 2004, CMS 
hired  100  funding  review  specialists  who  report  to  CMSO  even  though  they  are 
nominally attached to a RO to assist in certain financial management activities.  In the 
Medicare program financial activities are being reviewed by the CFO of CMS, and 
Regional offices are executing limited financial management related to disbursements.  
	 While regional office personnel are utilized in the oversight of financial activities in both 
the  Medicare  and  Medicaid  programs,  because  Medicaid  is  administered  as  a 
Federal/State  partnership,  there  are  less  Federal  FTEs  supporting  the  financial 
management oversight function of the Medicaid process.  In both cases, the regional 
personnel report to regional administrators instead of headquarters personnel responsible 
for administrating the programs. 
	 Oversight of financial management activities in the Medicaid program is different due to 
the nature of the Medicaid program.  CMS is responsible for administering Medicares 
day-to-day  operations  and  overseeing  the  contractors.  Over  the  last  10  years,  for 
Medicare, CMS has developed processes to periodically independently assess carriers 
and intermediary activities through use of SAS 70 audits.  For Medicaid, regional office 
reviews of state submissions of budget and execution reports, and State single audit 
reports are the primary means of overseeing the Medicaid financial activities. 
	 From a payment perspective, while Medicaid pays its states through grants administered 
by the DHHS PDM, Medicare pays its contractors utilizing draws through commercial 
banking institutions. 
Program Integrity ActivitiesAs both the Medicaid and Medicare programs grow in costs and 
complexity, program integrity activities within CMS have become more critical in ensuring that 
the programs are administered effectively and efficiently.  Up until the last several years, Federal 
resources applied to Medicaid program integrity activities were very limited as compared to 
Page 10  Medicare; however, both programs have implemented or expanded program integrity activities 
to identify potential deficiencies.  Although the Medicare program integrity activities are more 
developed, additional resources are being provided to support the development of additional 
programs within Medicaid.   
For Medicare, program integrity activities primarily take place under the authority of the OFM. 
The Medicare program includes a nationwide statistically derived sample of claims to project an 
annual error rate in the Comprehensive Error Rate Tracking program (CERT), and periodic 
reviews of controls at intermediaries (SAS 70s.) 
Program integrity activities within the Medicaid program are more diverse in that these activities 
take place largely in the states, but are augmented to some extent, through CMS oversight.  For 
example,  the  Medicare/Medicaid  Data  Match  and  the  PERM,  which  is  currently  under 
development, are the responsibility of the OFM, state single audits are performed in the states, 
and  the  Medicaid  Alliance  for  Program  Safeguards  (MAPS),  and  Medicaid  Eligibility  and 
Quality Control (MEQC) are performed within CMSO.  The Focused Financial Management 
Reviews are performed at the ROs.  To improve national consistency in the issuance and 
application of Medicaid reimbursement policies, the National Institutional Reimbursement Team 
(NIRT)  and  the  National  Non-Institutional  Provider  Team  (NIPT)  were  recently  developed 
within CMSO.  The NIRT is responsible for reviewing all institutional State Plan Amendments 
(SPAs),  providing  technical  assistance  to  the  states,  and  developing  Medicaid  institutional 
reimbursement regulations and policy.  NIPT functions similarly to the NIRT, but for non-
institutional providers, namely physicians.    
In the Deficit Reduction Act (DRA) of 2005, Congress has approved an additional 100 FTEs to 
increase  its  focus  on  Medicaid  program  integrity  activities.    In  section  6035  of  the  DRA, 
Congress mandated CMS to enter contracts with eligible entities to perform some of the very 
functions that Medicare payment contractors have historically performed (prepayment reviews 
of claims, audits, identification and return of overpayments, provider outreach and the like).  The 
following table presents a key comparison of major program integrity activities of the Medicare 
and Medicaid program: 
Medicare  Medicaid 
Program  Integrity    Comprehensive Error Rate    Medicaid Alliance for Program 
Activities  Tracking (CERT)  Safeguards (MAPS) 
  Hospital Payment Monitoring    Medicaid Eligibility and Quality Control 
Program (HPMP)  (MEQC) 
  Audit Quality Review (AQR)    Payment Error Rate Measurement 
  Medicare Program Integrity  (PERM)  under development 
(MIP)    State single audits and desk reviews 
  Medicare/Medicaid Match    Focused Financial Management Reviews 
  SAS 70 IT Audits    Medicare/Medicaid Match 
  Voluntary SAS 70 IT audits at certain 
states 
  State Plan Amendments (SPA) and 
waiver reviews 
Page 11  Role of the Carriers and Intermediaries Versus the States  For Medicare activities, CMS 
establishes and disseminates nationwide coverage rules to carriers and intermediaries which are 
intended  to  be  uniformly  implemented.    Intermediaries  provide  local  administration  of  the 
Medicare  Program  by  processing  Medicare  benefit  claims  and  issuing  benefit  checks  to 
providers.  The  Medicare  contractors  provide  technical  assistance  to  providers  and  service 
beneficiaries needs, and respond to inquiries.  The providers are responsible for the services to 
the Medicare participants.  The regional office employees mainly provide direct services to 
Medicare contractors, state agencies, health care providers, beneficiaries, and the general public. 
The Medicaid program is substantially less uniform.  Within broad national guidelines set by the 
Federal government states administer the Medicaid and SCHIP programs.  Each of the states 
establishes its own eligibility standards; determines the type, amount, duration, and scope of 
services; sets the rate of payment for services; and administers its own program. The states also 
prepare budget and expenditure reports quarterly and submit them to the regional office for 
review.  Nationwide, there are 10 regional offices with the responsibilities of acting as a liaison 
between central office and the states, reviewing the budget and expenditure submissions from the 
states, and preparing the regional decision report based on the submissions from the states, and 
transmitting  that  decision  to  CMSO.  The  CMSO  serves  as  the  focal  point  for  all  agency 
interactions with states and local governments.  The CMSO develops national Medicaid policies 
and procedures that support and assure effective state program administration. The states and 
CMSO develop and test new and innovative methods to improve the Medicaid programs through 
demonstrations and best practices.   
We discussed our comparison of the two programs with the stakeholders.  Most stakeholders 
indicated that because of fundamental differences in the programs, while the comparison of the 
Medicare program to the Medicaid program can be useful in identifying high level gaps (for 
example, lack of a PERM process) it was less useful in assessing how financial management 
activities  are  carried  out.    Our  analysis  supported  the  view  that  the  Medicare  financial 
management  approach  is  not  directly  applicable  to  the  Medicaid  program  because  of  the 
fundamental differences in the programs. 
PROGRESS  NOTED  ON  CORRECTIVE  ACTIONS;  HOWEVER  FURTHER 
ENHANCEMENTS ARE NEEDED 
Beginning in the mid 1990s, GAO, the OIG and other financial auditors have identified and 
reported on serious deficiencies in the financial management activities and oversight of the 
Medicaid  programs.    The  weaknesses  identified  in  our  review  consisted  largely  of  (1) 
organizational structure limitations that impact CMS headquarter and regional office oversight, 
(2) insufficient program integrity programs including an estimate of improper payments, (3) 
insufficient follow-up of single audit report deficiencies particularly as they relate to eligibility 
determination, and (4) need for clear cut guidelines for approving and reviewing waivers and 
state plan amendments. Recommendations to address these weaknesses included ways CMS 
could define lines of authority or restructure its organization, the need to continue to develop 
strategies in implementing new directives and allocating resources, and the continued need to 
improve internal control over certain aspects of administration and oversight within the Medicaid 
programs.   In the past several years, CMS has focused on resolving several of these issues 
Page 12  identified; however, more progress is needed to resolve many of the more complex issues.  As 
part of this engagement, we have reviewed the status of corrective actions regarding Medicaid 
financial management.  Appendix A discusses the issues and recommendations identified in prior 
reports and corrective actions taken. 
Over the past several years, CMS has focused on making improvements to its Medicaid financial 
management  processes.    Many  of  these  improvements  are  still  underway  and  have  taken 
significant  resources  and  time  to  implement  due  to  the  complexity,  the  cost,  the  need  for 
legislative approval, or limited personnel resources available to the Medicaid financial process. 
Steps taken include the following: 
	 Beginning  in  FY  2004,  CMS  was  provided  the  authority  to  hire  100  FTE  funding 
specialists to monitor state budget-making processes, examine quarterly funding requests 
and work with states to ensure that the administration of Medicaid activities within the 
state meet Federal requirements.  Additionally, the funding specialists will participate in 
financial  management  reviews  of  specific  financing  arrangements  at  the  states  and 
participate  in  the  development  of  findings related  to  those  reviews.    These  funding 
specialists are independent of the financial analysts within the RO.  As of April 2005, 95 
of the 100 funding specialists had been hired with 10 located at CMSO headquarters and 
85 located in the regional offices and states.  All 95 employees have been sent to a formal 
two-week training to provide an understanding of CMSO policies and operations related 
to Medicaid reimbursement and state financing and will attend ongoing training to be 
updated on future changes.  We visited two new funding specialists from the State of 
Maryland and the District of Columbia.  At the time of our visitsbetween February 
2005 and April 2005the funding specialists were in the early stages of learning the 
position. At the time of our interview, it was too early to determine the effectiveness of 
the new funding specialists, what specific tasks they would perform or how they would 
be measured, but their presence was frequently identified as part of the overall solution in 
enhancing Medicaid financial management. 
	 CMS has instituted a financial management work planning process which was responsive 
to ensure prior organization structure concerns were addressed.  Under the process each 
regional office proposes an annual workplan describing specific activities that it will 
perform and be held accountable for throughout the fiscal year.  Each regional office 
workplan is reviewed and approved through the Regional Administrator and the CMSO. 
The process incorporates a resource assessment effort and risk assessment and analysis. 
CMS indicated that the goal in establishing the financial management workplan is to 
strengthen CMS Medicaid financial oversight by establishing performance expectations, 
to track related actions and their results, and to improve communication among CMSO 
and the regions. 
	 Analysis  of  changes  in  quarterly  budget  and  expenditure  submissions  is  a  major 
consideration  in  the  regional  offices  recommendation  to  award  a  grant  or  validate 
expenditures and a step in the CMS Financial Review Guide.  We noted in our FY 2004 
internal control report that regional office documentation to support the analysis of state 
submissions was not adequate.  Ongoing training has been provided for CMSO and 
regional  office  personnel  to  ensure  up-to-date  knowledge  of  CMSO  financial 
management and oversight policies.    The FY 2005 report on internal control noted 
Page 13  certain improvements in documentation related to the analysis of state submissions as 
compared to weaknesses identified during FY 2004.   
	 To address concerns about the need for additional program integrity issues, the DRA 
passed in early 2006 will provide 100 additional FTEs to support Medicaid activities and 
provide for additional funds in Medicaid integrity programs to improve the accuracy of 
payments  in  the  Medicaid  Program.    The  Act  also  appropriated  an  additional  $630 
million over the next 10 years to carryout the Medicaid integrity program, as well as an 
additional $125 million over five years.   
	 As more fully addressed below, CMS initiated its PERM programa program whose 
methodologies were defined by CMS for consistent application by all states to calculate 
improper payment error rates.  Under PERM, Medicaid has 3 components  a fee-a-for-
service error rate, an eligibility error rate, and a managed care error rate.  A national 
contractor will calculate the Medicaid fee-for-service and managed care error rates for 
each state once every 3 years or 17 states each year.  The states will conduct an eligibility 
review once every 3 years and submit the results to CMS for calculation of the states 
eligibility error rate.  The PERM is expected to be published as an interim final rule at the 
end of August 2006. 
	 In an effort to improve national consistency in the issuance and application of Medicaid 
reimbursement policy, CMS has developed the NIRT, who is responsible for reviewing 
all institutional reimbursement state plan amendments, providing technical assistance to 
the states, and developing Medicaid institutional reimbursement regulations and policy. 
As a result of this effort, CMS believes the teams work will help ensure consistency in 
the application and review of Medicaid policies.  A separate teamNIPThas also been 
established for non-institutional providers, namely physicians. 
	 CMS has initiated plans in developing a new financial management systemHIGLAS 
for the Medicaid and Medicare financial activities.  Full implementation is expected by 
FY 2007. 
	 The FY 2005 CMS financial audit reported that although the methodology currently 
employed by CMS can produce a reasonable incurred-but-not-reported (IBNR) estimate 
for Medicaid financial reporting, the process is highly dependent on information provided 
by the various states.  Errors, inconsistencies and varying interpretations at the state level 
can  occur  and  significantly  affect  the  CMS  IBNR  liability.    CMS  has  developed  a 
workgroup consisting of CMSO, the Office of the Actuary (OACT), and OFM to meet 
periodically to discuss the progress in developing a methodology to collect the necessary 
data to estimate an IBNR amount from claims data maintained internally.   
Recent  initiatives  to  provide  an  additional  100  personnel  focused  on  Medicaid  financial 
management, and just enacted legislation, to add a further 100 personnel and additional financial 
resources focused on program integrity are significant steps that can dramatically enhance the 
role the Federal government plays in managing the Federal and state partnership for Medicaid. 
Factors  for  CMS  to  consider  as  it  develops  its  plans  to  deploy  resources  include  placing 
additional focus on how such resources are deployed and utilized, efforts to provide transparency 
in how state plan amendments, waivers, and routine Federal oversight activities are conducted 
with visibility into outcomes across states to the extent practical, and/or potentially introducing 
Page 14  financial  management  oversight  through  a  CFO  organization  independent  of  program 
administration activities. 
Although progress has been made and is expected to be ongoing, emphasis is still needed in 
completing certain corrective actions and resolving other issues more fully described in the 
sections that follow.  In its June 2006 report, GAO identified certain actions CMS had taken 
subsequent to our fieldwork to address many of these issues. 
ORGANIZATIONAL STRUCTURE CREATES CHALLENGES 
GAOs Standards for Internal Control in the Federal Government provides that an agency 
organizational structure is appropriate for the nature of its operations and designed so that 
authority  and  internal  control  responsibility  is  defined  and  well  understood.    CMS 
organizational structure creates challenges in effectively administering and overseeing Medicaid 
activities.   We noted two areasregional office resources and the lack of a separate CFO for 
Medicaid where stakeholders indicated concern that the organizational structure for Medicaid 
activities was not designed appropriately or lines of authority were unclear.   
Regional Office Resources 
As GAO reported in FY 2002, although CMSs 10 regional offices are the Federal governments 
frontline  for  overseeing  state  Medicaid  financial  operations  and  expenditures,  there  are  no 
reporting lines to the headquarters unit responsible for Medicaid financial management (CMSO). 
Currently  regional  office  personnel  report  to Regional  Administrators.  Each  regional  office 
proposes an annual workplan describing specific activities that it will perform and be held 
accountable for throughout the fiscal year.  Each regional office workplan is reviewed and 
approved  through  the  Regional  Administrator  and  the  CMSO.    The  process  incorporates  a 
resource assessment effort and risk assessment and analysis.  CMS has noted that this plan 
cannot be changed without approval of the central office.  However, one stakeholder indicated 
that because the operating budget for CMS is focused on the payment of Medicare claims, 
Medicaid resources are sometimes taken away or shared to perform Medicare responsibilities in 
the regional offices.  This could happen each time the priorities change or there is a limitation of 
available resources.  Another stakeholder indicated that lines of authority need to be drawn 
between the regional personnel performing key functions and the Headquarter division with 
authority  over  the  program.    Since  ultimately  the  administration  of  Medicaid  is  a  shared 
responsibility with the states, some stakeholders felt that CMS should consider realigning some 
of the regional personnel to report directly to the CMSO to ensure priorities within the Medicaid 
process are met.  Approximately 65 funding specialists located in the regions are allotted to the 
Medicaid program.  Beginning in September 2004, 100 funding review specialists were hired 
who report to CMSO.  The impact of those 100 new specialists has yet to be seen at the end of 
our fieldwork. 
Lack of Medicaid CFO 
Although the Medicaid program exceeds costs of $180 billionone of the Federal Governments 
largest programs, a CFO or an independent executive to oversee financial activities has not been 
Page 15  created.  Currently, financial management oversight is primarily taking place within the CMSO 
with the Director of CMSO also serving as the CFO.  Bookkeeping responsibilities and certain 
program integrity activities are taking place within the OFM. 
In February 2004, a study, Medicaids Federal-State Partnership:  Alternatives for Improving 
Financial Integrity, performed by the Henry J. Kaiser Family Foundation, suggested that a CFO 
be created for the Medicaid program.  In the study, the foundation noted that Medicaid pursued 
funding without the standing and credibility of a dedicated CFO.  It noted that the CMS CFO 
does  not  currently  exercise  authority  over  substantive  financial  matters  affecting  Medicaid; 
instead, those authorities reside in the director of CMSOthe same individual charged with 
achieving programmatic objectives and effective working relationships with the states.  In its 
suggested possibilities for reform, the foundation stated that vesting financial oversight and 
authority in executive officers whose sole function is to create and enforce financial controls and 
accountability would aid in increasing accountability.  
Our discussions identified varying opinions on whether a separate CFO should be appointed to 
oversee and create additional emphasis for Medicaid financial management activities.  Of the 
four stakeholders who expressed a view on this issue, two stakeholders felt that a separate CFO 
was warranted.  In discussing this point, some of the stakeholders linked this desire for a separate 
CFO to a concern that certain funding mechanisms may have been developed in consultation 
with CMS, and other potentially costly decisions were made without independent analysis of the 
ultimate cost of the changes.  Accordingly, routine decision making may have a significant 
financial impact inadvertently.  The Medicaid program, including reviews of SPAs, was noted as 
lacking transparency. SPAs are initially submitted by the states to the CMS ROs then reviewed at 
the CMSO through the NIRT and NIPT.  SPAs are largely the process where state funding 
mechanisms are approved. While SPAs are generally not shared with OMB, demonstration 
projects, including assertions that such projects will be budget neutral, are shared with OMB. 
Transparency and visibility concerns were raised principally within the context of understanding 
how state plans, funding mechanisms and application of the regulatory framework compare 
across the states.  They were focused on how processes to critically assess and monitor state 
plans, funding mechanisms and their implementation could vary by state and create perceived 
inequities or give rise to decisions with long term consequences not finally understood by all 
stakeholders.  Tools such as creating a repository of all state plans, funding mechanisms and 
administrative decisions available in a searchable and comparative format were discussed.  We 
understand  that  aspects  of  such  a  plan  are  under  consideration  by  CMS,  but  not  funded. 
Transparency  for  decisions  made  was  one  perceived  possible  benefit  for  a  separate  CFO 
organization.  The stakeholders indicated that other formulations to provide such visibility may 
be possible. 
Views of the four stakeholders presenting a position were as follows: 
	 One stakeholder felt that a separate CFO could create more visibility into the Medicaid 
program.  The sense of this discussion; however, was to question whether, depending on 
how such a separate CFO function was created and staffed, there would be a substantive 
change in the decision making process and visibility into key decisions. 
	 Another stakeholder indicated they believe there should be a separate CFO for Medicaid 
activities.  It would provide for a clearer segregation of duties between the program and 
Page 16  financial  processes,  demonstrate  independent  oversight  of  program  activities  by  a 
separate  financial  team,  and  be  in  the  best  interest  for  the  American  tax  dollars. 
Currently, they believe that having the duties of the CFO be subsumed into CMSO 
creates  an  appearance  of  little  independence  between  both  program  and  financial 
activities and may hinder transparency.   
	 According to a CMS stakeholder, one could argue that there is a need for separate 
Medicare and Medicaid CFOs. However, this stakeholder does not feel that this is a good 
idea due to the expertise within CMSO and the complexity of the program, and that if the 
duties of such a position were segregated; they should be resident within CMSO.  
	 CMSO indicated that it believes that the merits of having one person directly accountable 
to the legislators argue for no separate CFO.  In regard to a segregation of duties between 
the CFO, Chief Operating Officer (COO), and program design and administration this 
CMSO stakeholder feels that because of the way Medicaid is designed these duties would 
be better suited within CMSO.  Currently, because the administration of the program is 
within the states, it is the belief of CMSO that there are more than 50 financial managers 
and COOs.  In addition, CMSO feels that it is critical due to the complexity of the 
program for one unit to have the global view of activitiesboth financial and program. 
For example, they expressed a view that believed that a divided structure would not have 
been able to restructure one states financing plan successfully because one person saw 
the whole picture thus enabling accountability within that state.  Additionally, if more 
segregation of duties is created, CMSO feels that resources will be stretched and believes 
it is more efficient to have CMSO overseeing everything.  
Our review of other operating components within DHHS generally identified a separate CFO 
from program responsibilities.  Although many of the operating components utilized the DHHS 
Program Support Center to outsource accounting and bookkeeping responsibilities, the operating 
component  maintained  a  separate  CFO  whose  authority  dealt  with  making  financial  and 
budgeting decisions.  Such a model, segregating the duties of the CFO from the duties of the 
underwriter or the loan originator within other insurance and financial related businesses is 
generally the norm. 
Concerns  exist  regarding  the  independence  of  the  CFO  activities  and  the  need  to  enhance 
visibility  into  key  decisions.  There  are  differing  views  on  whether  or  not  and  how  an 
independent CFO would address these concerns effectively. 
PAYMENT  ERROR  RATE  MEASUREMENT  DEVELOPMENT  AND 
IMPLEMENTATION STILL IN PROCESS 
The  Federal  government  and  states  each  have  responsibilities  for  administering  Medicaid 
programs and for ensuring that Medicaid funds are spent appropriately on covered services 
provided  to  eligible  beneficiaries.    CMS  administers  Medicaid  at  the  Federal  level  and 
establishes policies related to preventing and detecting improper payments.  Beginning in the 
mid-1990s, financial auditors reported that CMS needed to develop a process in estimating 
improper  payments  in  the  Medicaid/SCHIP  programs  to  mirror  similar  reporting  for  the 
Medicare program.  In FY 2002, Congress passed the Improper Payment Integrity Act (IPIA.) 
Page 17  One practical implication of the IPIA has been to require CMS to design a methodology and 
calculate an error rate for improper payments within the Medicaid/SCHIP programs.  Although 
previous  pilot  programs  were  initiated  through  FY  2005,  CMS  has  been  unsuccessful  in 
developing a national error rate for the Medicaid/SCHIP programs. 
During FY 2006, CMS initiated its implementation of the PERM programa program whose 
methodologies were defined by CMS for consistent application by all states.  CMS would use 
HCFAC  funds  to  reimburse  the  states  for  costs  incurred.    Under  PERM,  Medicaid  has  3 
components  a fee-a-for-service error rate, an eligibility error rate, and a managed care error 
rate.  A national contractor will calculate the Medicaid fee-for-service and managed care error 
rates for each state once every 3 years or 17 states each year.  The states will conduct an 
eligibility review once every 3 years and submit the results to CMS for calculation of the states 
eligibility error rate.  The PERM is expected to be published as an interim final rule at the end of 
August 2006.  The effectiveness of result of the first year of the program was not available to us 
at the end of fieldwork. 
CMS is still determining how the results will be utilized once the program is fully implemented 
and what actions will be taken with the states to reduce calculated errors.  Legislationthe 
DRA has been passed to add 100 additional staff to support program integrity initiatives.  How 
these  FTEs  will  be  utilized  is  still  under  discussion  through  a  DRA  workgroup  of  senior 
executives within CMS and DHHS. 
Based on discussions certain concerns with the PERM program were raised.  One stakeholder 
expressed a belief that, because the primary purpose of the PERM is to provide a tool for 
satisfying the requirements of the IPIA, and because of the methodologies being employed, the 
PERM may not be suitable for some other desirable program oversight purposes.  For example, 
because  the  PERM  will  calculate  an  error  rate  for  each  state  only  every  third  year,  the 
stakeholder  believes  it  will  be  difficult  for  states  to  use  PERM  results  to  monitor  the 
effectiveness of corrected actions.  Further, the stakeholder believes the PERM is not designed to 
produce a national error rate that is comparable from year to year, a comparison that might be 
useful for CMSs oversight of Medicaid.  More broadly the stakeholder believes that devoting 
state and Federal resources to the measurement of an error rate is likely to leave fewer resources 
available  for  addressing  the  underlying  causes  of  the  errors  measured.    However,  other 
stakeholders indicated that the results from PERM would likely be used for some of the same 
purposes the previous stakeholder questioned. 
When stakeholders were asked how the resulting measures would be used to improve Medicaid 
program integrity, most stakeholders indicated that trends could be developed to determine if 
progress was being made to reduce, prevent and detect improper payments.  CMSO indicated 
that  it  would  consider  eventually  using  the  error  rate  process  to  pursue  with  each  state 
reimbursement for improper payments. 
There will be a substantial investment of resources in developing error rate measures under 
PERM for compliance with IPIA.  The ultimate focus of the program is still under development, 
as is the strategy to use the results of PERM on managing the program.  Pending finalization of 
such plans and processes, the ultimate use of this information remains to be determined. 
Page 18  STATE OVERSIGHT AND SINGLE AUDIT PRIMARY TEST FOR ELIGIBILITY AND 
PROGRAM COMPLIANCE 
Medicaid is a needs-based program that provides payment for certain medical services to low-
income individuals and families.  The costs and administration of the Medicaid program are 
shared  by  the  Federal  and  state  governments.    Administration  at  the  state  level  includes 
determining individuals eligibility and benefit levels.  Federal oversight responsibilities include 
monitoring  states  performance  using  MEQCS.    In  determining  eligibility,  mistakes  are 
sometimes made or inaccurate information provided, which results in overpayments of medical 
services provided to clients.  Overpayments generally result when a (1) participating household 
or individual intentionally provides incorrect or insufficient information on which eligibility 
determinations  are  based,  (2)  participating  household  or  individual  unintentionally  provides 
incorrect or insufficient information, or (3) state administering agency incorrectly determines 
eligibility  or  benefits  or  does  not  correctly  act  on  client-reported  information.    Program 
administrators  try  to  prevent  overpayments  by  carefully  determining  an  applicants  initial 
eligibility.  However, errors are difficult to identify and when errors are made and identified, 
recovering overpayments is often very time consuming and difficult.   
One of the primary tools in testing the states quality control systems over determination of 
eligibility  is  the  states  single  audits.    During  FY  2005,  11  states  received  disclaimers  or 
qualified reports by independent auditors on compliance with Medicaid program requirements, 
compliance findings in single auditors reports requiring resolution, and various differences in 
processes,  systems,  and  issues  from  state  to  state.    The  majority  of  these  disclaimers  or 
qualifications were a result of noncompliance with eligibility requirements. 
We discussed with the stakeholders whether the CMS should expand its role in determining 
eligibility.  Because responsibility for eligibility determination is statutorily assigned to the 
states,  stakeholders  generally  believed  that  CMS  role  should  be  in  overseeing  the 
implementation  of  quality  control  systems  at  the  states  to  reduce  errors  in  eligibility 
determination.  Although CMS performs some follow up on findings identified in the single 
audits including comments related to eligibility determination, the majority of the stakeholders 
believed that more needed to be done.  According to one stakeholder, there needs to be more 
funding directed to expanding the role of the Federal government when it comes to the oversight 
of the states regarding eligibility. 
Our work suggests that further emphasis to follow up on single audit findings with a particular 
emphasis on eligibility is warranted.  CMS noted efforts were underway subsequent to our 
fieldwork to resolve current outstanding A-133 audits and to ensure prompt and timely resolution 
of future audits. 
RECOMMENDATIONS FOR EXECUTIVE ACTION 
Recent  initiatives  to  provide  an  additional  100  personnel  focused  on  Medicaid  financial 
management, and just enacted legislation, to add a further 100 personnel and additional financial 
resources focused on program integrity are significant steps that can dramatically enhance the 
role the Federal government plays in managing the Federal and state partnership for Medicaid. 
Page 19  Factors  for  CMS  to  consider  as  it  develops  its  plans  to  deploy  resources  include  placing 
additional focus on how such resources are deployed and utilized, efforts to provide transparency 
in how state plan amendments, waivers, and routine Federal oversight activities are conducted 
with visibility into outcomes across states to the extent practical, and/or potentially introducing 
financial  management  oversight  through  a  CFO  organization  independent  of  program 
administration  activities.  To  strengthen  Medicaid  internal  controls  and  financial  oversight 
processes that CMS has in place to ensure the effective processing of Medicaid activity, we 
recommend the following:   
	 Segregate, where practicable, the program activities associated with administering the 
Medicaid program from the financial management related aspects traditionally associated 
with the activities of CFOs.  Because of the unique nature of the Medicaid program 
certain duties might continue to be within CMSO even though those duties are of a 
financial nature. 
	 To  the  extent  possible,  provide  visibility  into  the  program  administration  activities, 
including judgments regarding individual state operations, which can help ensure that 
decisions are made transparently and consistently across jurisdictions recognizing the 
unique  nature  of  each  local  Medicaid  program.    Because  routine  judgments  or 
interpretations may have long term funding consequences, a process to assess which 
decisions merit further visibility should be developed and implemented. 
	 Consider  aligning  the  regional  office  personnel  to  headquarter  program  offices  or 
consider developing a mechanism so that as priorities change a minimum number of 
FTEs  are  continuously  focused  on  Medicaid  financial  administration  and  oversight 
activities.    Such  alignment  change  options  range  from  fundamentally  revisiting  the 
regional structure to building on the existing annual region plans to designate particular 
personnel and provide for input regarding performance of the personnel assigned and 
resources devoted by program (CMSO) personnel. 
	 Continue to develop a process to monitor the responsibilities of the new 100 funding 
specialists and the results of their efforts.  Additionally, consider reviewing periodically 
the distribution of the specialists to ensure proper allocation to locations that may need 
further emphasis to be responsive to risk.  One input to this process may lie in the 
severity and nature of single audit findings. 
	 Continue  to  develop  a  comprehensive  strategic  plan  through  the  work  of  the  DRA 
workgroup in identifying the authority and responsibility and in the recruiting, training 
and placement of the new 100 FTEs that have been recently legislated within the DRA.  
	 Develop a strategy in enhancing internal control as it relates to assessing state quality 
control systems over eligibility determination, and following up on single audit issues.   
	 Continue to refine procedures to provide a mechanism for CMS central and regional 
offices to monitor states activities, documenting the results, and enforce compliance and 
consistency with CMS financial management procedures.   
	 Continue to develop strategies in refining communication between the States, regional 
offices, and headquarters to ensure the various groups complement each others efforts in 
Page 20  carrying out their authority in accomplishing the Medicaid Program goals.  This is critical 
with limitations of available resources.    
	 Continue in the implementation of the PERM process to estimate improper payments for 
both the Medicaid and SCHIP- related payments.   Additionally, develop a strategy on 
how  the  results  of  the  PERM  will  be  utilized  in  strengthening  internal  control  and 
reducing improper payments. 
	 Continue  to  enhance  its  financial  systems  at  the  Federal  and  state  level  to  ensure 
compliance with the Federal requirements.  
AGENCY COMMENTS AND OUR EVALUATIONS 
During August 2006, we received written comments from CMS on a draft of this report.  The full 
text of CMS comments is located in Appendix B.  In its written comments, CMS outlined a 
series of actions it has begun to take to address its Medicaid financial management challenges 
many of which were implemented or in process of being implemented subsequent to our end of 
fieldwork for this report. These improvements included creation of the Medicaid Integrity Group 
(MIG) and the implementation of the Comprehensive Medicaid Integrity Plan, among others.   
Additionally, CMS indicated they did not believe it was necessary to create another new and 
separate financial structure for Medicaid financial management activities, at a time when they 
continue to move forward rapidly on many unprecedented steps to strengthen Medicaid financial 
management.   CMS further indicated that they believe that their limited resources should 
continue to be focused on improvements to the current oversight structure.  Finally, CMS 
included  certain  technical  comments  that  were  considered  and  incorporated,  as  deemed 
appropriate, in the completion of this report. 
Page 21  Centers for Medicare & Medicaid Services 
Acronyms 
AQR  Audit Quality Review Program 
CFO      Chief Financial Officer 
COO      Chief Operating Officer 
CMS  Centers for Medicare & Medicaid Services 
CMSO  Centers for Medicaid and State Operations 
DHHS  Department of Health and Human Services 
DPM  Division of Payment Management 
DRA      Deficit Reduction Act 
FMAP  Federal Matching Assistance Percentage 
FTE      Full-Time Equivalent 
FY      Fiscal Year 
GAO      Government Accountability Office 
HCFAC  Health Care Fraud and Abuse 
HIGLAS  Health Care Integrated General Ledger Accounting System 
IPIA  Improper Payment Integrity Act of 2002 
MAPS  Medicaid Alliance for Program Safeguards 
MBES  Medicaid Budget and Expenditure System 
MEQC  Medicaid Eligibility and Quality Control 
MIP      Medicare Program Integrity 
NIPT      National Non-Institutional Provider Team 
NIRT      National Institutional Reimbursement Team 
OACT  CMS Office of the Actuary 
OFM  Office of Financial Management 
OIG  Office of Inspector General 
OMB  Office of Management and Budget 
PERM  Payment Error Rate Measurement Program 
RO      Regional Offices 
SCHIP     State Childrens Health Insurance Program 
SPA      State Plan Amendments 
Page 22  Centers for Medicare & Medicaid Services 

Other Related Products 

	 The  Kaiser  Commission  on  Medicaid  and  the  Uninsured  Medicaids  Federal-State 
Partnership: Alternatives for Improving Financial Integrity, February 2004 
	 The  Committee  on  Energy  and  Commerce  Joe  Barton,  Chairman  U.S.  House  of 
Representatives Barton Seeks Medicaid Documents From Hospitals, January 2005 
	 Ernst & Youngs Report on Internal Control, Report on Compliance with Laws and 
Regulations, December 1, 2004, and CMSs response, November 19, 2004 
	 Ernst & Youngs FY 2005 Report on Internal Control, Report on Compliance with Laws 
and Regulations, October 28, 2005 
	 Letter  from  the  Honorable  Charles  E.  Grassley,  Chairman,  Committee  on  Finance, 
August 18, 2004, and CMSs response, January 18, 2005 
	 Reducing Medicaid Fraud The Potential of the False Claims Act, June 2003 
	 The  Kaiser  Commission  on  Medicaid  and  the  Uninsured  Upper  Payment  Limits: 
Reality and Illusion in Medicaid Financing, February 2002 
	 Testimony of Dennis Smith, Director CMSO, Senate Subcommittee on Federal Financial 
Management, March 28, 2006 
OIG Reports 
	 Adequacy of Washington States Medicaid Payments to Newport Community Hospital, 
Long-Term Care Unit (A-10-04-00001), March 2005 
	 Review of Colorados Accounts Receivable System for Medicaid Provider Overpayments 
(A-07-04-03049) July 2004 
	 Audit of Medicaid Family Care Administrative Costs Claimed for the Period  
October 1, 1999 through December 31, 2002  Wisconsin Department of Health and  
Family Services Madison, Wisconsin (CIN A-05-03-00067), June 2004 
	 Testimony of Daniel R. Levinson, Inspector General, Senate Subcommittee on Federal 
Financial Management, March 28, 2006 
	 Review of Ohios Medicaid Disproportionate Share Hospital Payments (A-05-01-0058), 
June 2004 
Page 23  Centers for Medicare & Medicaid Services 

Other Related Products 

	 Review of Alabamas Medicaid Disproportionate Share Hospital Program

(A-04-01-02006), June 2004 

	 Audit of Californias Medicaid Selective Provider Contracting Program, July 1, 1998 
through June 30, 2002 (A-09-02-00082), May 2004 
	 Audit of Medicaid Provider Accounts Receivable Overpayments In Iowa  

(A-07-04-01002), March 2004 

	 Testimony of George M. Reeb, Assistant Inspector General for CMS, March 18, 2004 
	 Review of Medicaid Disproportionate Share Hospital Payment Limits for St. Vincent 
Charity  Hospital  and  St.  Lukes  Medical  Center,  Cleveland,  Ohio  (A-05-01-00087), 
March 2004 
	 Review of Medicaid Upper Payment Limit Requirements for Michigan  

(A-05-03-00065), January 2004 

	 Review of Federal Reimbursement for Health Care Coverage Under the State Childrens 
Health Insurance Program and Medicaid Program Wisconsin Department of Health and 
Family Services, Madison, Wisconsin (A-05-03-00092), October 2003 
	 Testimony of Michael F. Mangano, Principal Deputy Inspector General, June 13, 2002 
	 Medicaid Post Payment Safeguards (OEI-05-99-00072), July 2000 
	 Medicaid Claims Processing Safeguards (OEI-05-99-00071), July 2000 
	 Medicaid Proactive Safeguards (OEI-05-99-00070), July 2000 
GAO Reports 
	 Head Start Comprehensive Approach to Identifying and Addressing Risks Could Help 
Prevent Grantee Financial Management Weaknesses (GAO-05-176), February 2005 
	 Medicaid Drug Rebate Program Inadequate Oversight Raises Concerns About Rebates 
Paid to States (GAO-05-102), February 2005 
	 High-Risk Series An Update (GAO-05-207), January 2005 
	 Medicaid Program Integrity State and Federal Efforts to Prevent and Detect Improper 
Payments (GAO-04-707), July 2004 
Page 24  Centers for Medicare & Medicaid Services 

Other Related Products 

	 Medicaid  Waivers  DHHS  Approvals  of  Pharmacy  Plus  Demonstrations  Continue  to 
Raise Cost and Oversight Concerns (GAO-04-480), June 2004 
	 Medicaid Intergovernmental Transfers Have Facilitated State Financing Schemes 
(GAO-04-574T), March 2004 
	 Federal Budget:  Opportunities for Oversight  and  Improved  Use  of  Taxpayer  funds 
(GAO-03-1029T), July 16, 2003 
	 Medicaid and SCHIP:  Recent DHHS Approvals of Demonstration Waiver Projects Raise 
Concerns (GAO-02-817), July 2002 
	 Medicaid Integrity: Implementation of New Program Provides Opportunities for Federal 
Leadership to Combat Fraud and Abuse (GAO-06-578T), March 28, 2006 
	 Medicaid  Financial  Management:  Better  Oversight  of  State  Claims  for  Federal 
Reimbursement Needed (GAO-02-706T), June 13, 2002 
	 Medicaid  Financial  Management:  Better  Oversight  of  State  Claims  for  Federal 
Reimbursement Needed(GAO-02-300), February 2002 
	 Medicaid:  HCFA  Reversed  Its  Position  and  Approved  Additional  State  Financing 
Schemes (GAO-02-147) October 2001 
	 Medicaid Improved Federal Oversight of State Financing Schemes Is Needed  
	 (GAO-04-228), February 2004 
	 SCHIP:  DHHS Continues to Approve Waivers That Are Inconsistent with Program 
Goals (GAO-04-166R), January 2004 
	 Medicaid  HCFA  Reversed  Its  Position  and  Approved  Additional  State  Financing 
Schemes (GAO-02-147), October 2001 
	 Medicaid State Efforts to Control Improper Payments Vary (GAO-01-662), June 2001 
	 Medicaid State Financing Schemes Again Drive Up Federal Payments  
(GAO/T-HEHS-00-193), September 2000 
	 Medicaid in Schools Improper Payments Demand Improvements in HCFA Oversight 
(GAO/HEHS/OSI-00-69), April 2000 
Page 25  Corrective Action Taken or Planned by CMS  CMSO will revise the regional office Review 1. Guides for CMS-64, 37, 21, and 21b to include updated statutory and regulatory citations and to capture the steps that the regional offices should take in terms of their reviews of the aforementioned reports/forms, The MBES/CBES systems will be 2. programmed to require supervisory sign-off on regional office decisions, and Upon completion of the regional office review 3. guides, Central office staff will request copies of regional office work papers to perform 6 desk audits.  Central office staff will travel to four of the regional offices to perform in-depth reviews.  Corrective actions are currently being coordinated between the Office of Inspector General and the CMSO.   Additionally, CMSO has hired 100 new funding specialists to work with the states to gain compliance with Medicaid requirements. 
re and Medicaid Services (CMS) 
ndings and Corrective Actions 
Appendix A  Summary of Recommendations per Report  Ernst & Young recommended that CMS continue to refine its procedures to provide a mechanism for CMS central and regional offices to monitor states activities and enforce compliance with CMS financial management procedure by: Providing specific guidance in the use and 1. preparation of the Financial Review Guides to ensure that the regional offices consistently use the guide to document procedures performed during the quarterly expenditure and budgetary reviews and that any decision to expand or curtail the scope of the review or review procedures be documented; and  Developing a specific scope to be used to 2. identify areas for review and that this scope, or any deviations from the scope, be documented within the trend analysis work paper(s) along with explanations.    Ernst & Young recommended that DHHS and its Operating Divisions: Coordinate with the Census Bureau, the 1. centralized warehouse for Single Audit reports, to ensure the notification of the receipt of reports are received timely and information is accurate; Develop or enhance procedures to ensure 2. that DHHS grant recipients per the PMS system are reviewed/audited in accordance with A-133 and tracked in the current system available.  PMS and the tracking systems should be reconciled based on common identifiers on an ongoing basis, and Develop clear documentation to 3. demonstrate follow-up on audit findings and disclaimers of opinion on Medicaid program compliance.  Additionally, CMS does not sufficiently analyze or track resolution of findings at the States resulting from audits of internal controls in Medicaid and State Children's Health Insurance programs.  Page 1 of 7 
Centers for MedicaChart of CMS' Fi Significant Findings as Related to Medicaid Financial Management  The regional offices did not have the resources to conduct a thorough review of the budget and expenditure submissions from the states. In September 2000, CMSO issued financial review guides to assist the regional office analysts in examining budget and expenditure reports as well as to standardize the review procedures performed between analysts and regions.    Insufficient Documentation/Lack of Grants Monitoring.  During the review of single audits performed for recipients of Federal awards, untimely submission of audit reports and lack of evidence of follow-ups on audit findings were noted.  Additionally, CMS does not sufficiently analyze or track resolution of findings at the States resulting from audits of internal controls in Medicaid and State Children's Health Insurance programs (SCHIP). 
uer  ontrol,  ontrol, 
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FY Ern FY Ern Corrective Action Taken or Planned by CMS  A workgroup consisting of CMSO, OACT, and OFM will meet periodically to discuss the progress in developing a methodology to collect the necessary data to estimate an IBNR amount from claims data maintained internally. To accomplish this objective, OACT and CMSO will work to:    Create a medical statistical information 1. system (MSIS) extract for three states for FY 2003 and FY 2004 containing data elements needed for analyzing claim lags, Conduct exploratory analysis to determine 2. feasibility of using MSIS data in evaluating state IBNR submissions.  This will involve comparing estimates of IBNR at 9/30/02 with subsequent MSIS payments and developing claims lag factors from MSIS data and analyzing for reasonableness and consistency, If exploratory analysis conducted in (2) is 3. favorable, estimate resources needed to produce similar data and analysis for all states on an ongoing basis, OACT will develop an implementation plan 4. for ongoing use of MSIS in evaluating the state IBNR submissions, OACT will review the data received from the 5. Medicaid IBNR surveys for reasonableness, compare it to the MSIS extract described in (1) and make a determination as to the methodology for the calculation of the Medicaid IBNR estimate, OACT will provide the final estimate for the 6. Medicaid IBNR for inclusion into CMS' financial statements, and CMSO/OFM/OACT will draft the policies and 7. procedures for the calculation of the Medicaid IBNR. 
re and Medicaid Services (CMS) 
ndings and Corrective Actions 
Appendix A  Summary of Recommendations per Report  Ernst & Young recommended that CMS enlist OACT to help review the annual Medicaid IBNR calculation.  Ernst & Young further recommended that formal analytical review procedures (i.e. documented and reviewed) be developed to prevent or detect clerical errors in the spread sheets and that CMS proactively obtain input from the states via the regional offices on trends, system changes, program changes, etc. associated with individual states. For SCHIP, Ernst & Young recommended that CMS identify a methodology for estimating an IBNR for SCHIP related expenditures.  Page 2 of 7 
Centers for MedicaChart of CMS' Fi Significant Findings as Related to Medicaid Financial Management  Ernst & Young found that although the methodology currently employed by CMS can produce a reasonable IBNR estimate for Medicaid, the process is highly dependent on information provided by the various states. Errors, inconsistencies and varying interpretations at the state level can occur and significantly affect the CMS IBNR liability.  It should be noted that a 15-month time-lag exists from the date of the state IBNR information to the date of CMS fiscal year-end calculation.  Repeat Finding. 
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FY Ern Corrective Action Taken or Planned by CMS  CMS is currently in the process of implementing a new integrated financial management system and updating its policies and procedures that may resolve CMS' system issues (i.e. MBES and integrated through HIGLAS by the end of FY 2006).  CMS is currently in the process of implementing a new integrated financial management system and updating its policies and procedures that may resolve CMS' system issues.  (i.e., MBES and integrated through HIGLAS by the end of FY 2006).  On October 5, 2005, an interim final rule was published in the Federal Register, which indicated that CMS will measure Medicaid and SCHIP managed care and eligibility error rates. The CMS expects to be fully compliant with IPIA by FY 2008.  The CMS has established an eligibility workgroup to make recommendations on the best approach to conduct Medicaid and SCHIP eligibility reviews.  The plan is to have recommendations from the workgroup in FY 2006 so that eligibility reviews can commence in FY 2007 for error rate reporting in FY 2008.  CMS is currently in the process of implementing a new integrated financial management system and updating its policies and procedure that may resolve CMS' system issues.    The OIG is initiating a review of the obligations within DPM and differences that may exist with the operating division's financial systems.  CMS is currently developing a corrective action plan to resolve this issue. 
Centers for Medicare and Medicaid Services (CMS) 
Chart of CMS' Findings and Corrective Actions 
Appendix A  Significant Findings as Related to Summary of Recommendations per Report Medicaid Financial Management  CMS' financial management system (FMS) is Ernst & Young recommended that CMS not compliant with Federal Financial continue to enhance its financial systems to Management Improvement Act (FFMIA). ensure compliance with FFMIA. Ernst & Young noted certain deficiencies with FMS that currently would not be considered a single integrated financial system such as the limited traceability between FMS, MBES, and FACS.  Repeat Finding.  CMS' FMS does not meet the criteria Ernst & Young recommended that CMS specified in the FMFIA. Specifically, CMS continue to enhance its financial systems to does not have an integrated financial ensure compliance with FMFIA. management system, and CMS' FMS is unable to prepare financial statements and the Statement of Transactions as required. CMS' FMS does not provide the appropriate level of detail to support data analysis by the budget staff. Repeat Finding.  CMS is not fully compliant with the Improper Ernst & Young recommended that CMS Payment Information Act of 2002 (IPIA). continue to implement a process to estimate Ernst & Young noted that the nationwide improper payments for both the Medicaid and estimates of Health Programs improper SCHIP-related payments. payments and rates were not reported in FY 2005.  Repeat Finding.  There are inadequate formal written policies Ernst & Young recommended that CMS and procedures in place for access control. update its policies and procedures.  Additionally, certain weaknesses were identified during Ernst & Young's vulnerability and penetration testing.  Repeat Finding.  CMS lacks sufficient integration or Ernst & Young recommended that CMS work reconciliation and tracking processes to with Division of Payment Management (DPM) ensure that obligation activity within the to reconcile the expenditures reported on the Payment Management System, which tracks CMS 64 and the PMS 272. draws for state grants, is consistent with obligation activity within CMS general ledger.   Page 3 of 7 
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Title,  eport ung  eport ung  eport ung  eport ung  eport ung 
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Re 20st  20st  20st  20st  20st 
FY Ern FY Ern FY Ern FY Ern FY Ern Corrective Action Taken or Planned by CMS  CMS has implemented a policy of writing white papers on certain issues that may affect its financial statements.    The CMS will not approve new SPA proposals until states have fully explained how they finance their Medicaid programs and until such time that states have agreed to terminate any such financing schemes.  The CMS is working with states to terminate such practices, which many states have agreed to stop as of the end of their 2005 state fiscal year.  As of September 30, 2005, 26 states have terminated 62 such financing practices effective with the end of their state fiscal year 2005. 
re and Medicaid Services (CMS) 
ndings and Corrective Actions 
Appendix A  Summary of Recommendations per Report  Ernst & Young recommended that CMS develop a process for proper identification and resolution of financial reporting and management issues. As CMS Health Programs grow and consume additional resources, at the margin it can be anticipated that certain matters which might formerly be insignificant in relation to CMS and DHHS as a whole may loom larger. CMS must establish consistent, clear-cut guidelines about states financing arrangements.  There should be assurance that the funds paid are actually used for the intended purposes.  There should be a clear trail of responsibility within the State as to who is accountable for proper expenditure of Medicaid funds.  The State Medicaid agency must ensure that quality and timely healthcare services are being delivered to properly eligible beneficiaries.  Page 4 of 7 
Centers for MedicaChart of CMS' Fi Significant Findings as Related to Medicaid Financial Management  Currently, the states use a CMS 64 to report accrued expenditures to CMS while the states submit a PMS 272 to report expenditures on a cash basis to the Payment Management System resulting in inconsistent expenditure activity within the two systems for the same grant.  CMS does not have proper identification and resolution of financial reporting and  management issues. As CMS Health Programs grow and consume additional resources, at the margin it can be anticipated that certain matters which might formerly be insignificant in relation to CMS and DHHS as a whole may loom larger.  There is no assurance that the Medicaid funds paid are actually used for the intended purposes.  States have used varied financing schemes, sometimes involving intergovernmental transfers, or IGTs, to increase Federal Medicaid matching  payments. Some states, for example, receive Federal matching funds on the basis of large Medicaid payments to certain providers, such as nursing homes operated by local governments, which exceed established Medicaid rates.  The large payments are often temporary, since the states can require the local-government providers to return all or most of the money to the states. States can use these funds  which essentially make a round-trip from the states to providers and back to the states at their own discretion. 
Report Title, Number, Issuer  FY 2004 Report on Internal Control, Ernst & Young   Adequacy of Washington States Medicaid Payments to Newport Community Hospital, Long-Term-Care Unit, (A-10-04-00001), OIG;  Review of Alabamas Medicaid Disproportionate Share Hospital Payments (A-04-01-02006), OIG;  Review of Ohios Medicaid Disproportionate Share Hospital Payments, (A-05-01-00058), OIG;  High Risk Series an Update, (GAO-05-207), GAO;    Testimony of George M. Reeb, Assistant Inspector General for the Centers for Medicare and Medicaid Audits to the House Committee on Energy and Commerce, March 18, 2004;  Medicaid Intergovernmental Transfers Have Facilitated State Financing Schemes (GAO-04-574T), GAO  Corrective Action Taken or Planned by CMS  CMS has hired 100 additional FTEs to support CMSO in the oversight of the state's budget and expenditure processes.  Additionally, CMS has initiated its implementation of the new PERM process that is expected to calculate an improper payment rate for each state once every three years.  CMS has hired 100 additional FTEs to support CMSO in the oversight of the state's budget and expenditure processes.  Additionally, CMS has began its implementation of the new PERM process that is expected to calculate an improper payment rate for each state.   During FY 2002, CMS instituted a Financial Management work planning process.  Under the process each regional office proposes an annual workplan describing specific activities which it will perform and be held accountable for throughout the fiscal year.  Each regional office workplan is reviewed and approved through the Regional Administrator and the CMSO.  The process incorporates a resource assessment effort and risk assessment and analysis.  CMS indicated that the goal in establishing the FM workplan is to strengthen CMS Medicaid financial oversight by establishing performance expectations, track related actions and their results, and improve communication among CMSO and the regions Finally, through the DRA act, Medicaid will be hiring 100 additional FTE's to support program integrity initiatives.  CMS has hired 100 additional FTEs to support CMSO in the oversight of the state's budget and expenditure processes.  Training has been provided to ensure regional office personnel and the new FTE's understand CMSO policies. 
re and Medicaid Services (CMS) 
ndings and Corrective Actions 
Appendix A  Summary of Recommendations per Report  The management oversight structure should be adequate to ensure that Medicaid funds are paid only for health care services and products that are appropriate and necessary.   Risk Assessment - GAO recommended that the CMS Administrator revise current risk assessment efforts in order to more effectively and efficiently target oversight resources towards areas most vulnerable to improper payments by:  collecting, summarizing, and incorporating profiles of state financial oversight activities, that include information on state prepayment edits, provider screening procedures, postpayment detection efforts, and payment accuracy studies;  incorporating information from reviews of state initiatives to prevent Medicaid fraud and abuse;   developing and instituting feedback mechanisms to make risk assessment a continuous process and to measure whether risks have changed as a result of corrective actions taken to address them; and  completing efforts to develop an approach to payment accuracy reviews at the state and national levels.   Financial Oversight Control Activities---GAO recommended that the CMS administrator restructure oversight control activities by  increasing in-depth oversight of areas of higher risk as identified from the risk assessment efforts and applying fewer resources to lower risk areas;  incorporating advanced control techniques, such as data mining, data sharing, and  Page 5 of 7 
Centers for MedicaChart of CMS' Fi Significant Findings as Related to Medicaid Financial Management  CMS has a problem with Medicaid fraud and its limited oversight is insufficient to protect the integrity of the program.  Better oversight of state claims for Federal reimbursement is needed.  Better oversight of state claims for Federal reimbursement is needed. 
Report Title, Number, Issuer  Medicaid Program Integrity:  State and Federal Efforts to Prevent and Detect Improper Payments, (GAO-04-707), GAO  Medicaid Improved Federal Oversight of State Financing Schemes Is Needed, (GAO-04-228), GAO  Medicaid Financial Management:  Better Oversight of State Claims for Federal Reimbursement Needed (GAO/AIMD 02-300), GAO  Medicaid Financial Management:  Better Oversight of State Claims for Federal Reimbursement Needed (GAO/AIMD 02-300), GAO 
        Corrective Action Taken or Planned by CMS  CMS has hired 100 additional FTEs to support CMSO in the oversight of the state's budget and expenditure processes.  Additionally, CMS has began its implementation of the new PERM process that is expected to calculate an improper payment rate for each state.    During FY 2002, CMS instituted a Financial Management work planning process.  Under the process each regional office proposes an annual workplan describing specific activities that it will perform and be held accountable for throughout the fiscal year.  Each regional office workplan is reviewed and approved through the Regional Administrator and the CMSO.  The process incorporates a resource assessment effort and risk assessment and analysis.  CMS indicated that the goal in establishing the financial management workplan is to strengthen CMS Medicaid financial oversight by establishing performance expectations, track related actions and their results, and improve communication among CMSO and the regions. Finally, through the DRA act, Medicaid will be hiring 100 additional FTE's to support program integrity initiatives.  During FY 2002, CMS instituted a Financial Management work planning process.  Under the process each regional office proposes an annual workplan describing specific activities that it will perform and be held accountable for throughout the fiscal year.  Each regional office workplan is reviewed and approved through the Regional Administrator and the CMSO.  The process incorporates a resource assessment effort and risk assessment and analysis.  CMS 
re and Medicaid Services (CMS) 
ndings and Corrective Actions 
Appendix A  Summary of Recommendations per Report  neural networking, where practical to detect potential improper payments; and  using comprehensive Medicaid payment data that states must provide in the legislatively mandated national MSIS database.   Monitoring Performance--GAO recommended that the CMS Administrator develop mechanisms to routinely monitor, measure, and evaluate the quality and effectiveness of financial oversight, including audit resolution, by  collecting, analyzing, and comparing trend information on the results of oversight control activities particularly deferral and disallowance determinations, focused financial reviews, and technical assistance;  using the information collected above to assess overall quality of financial management oversight;  identifying standard reporting formats that can be used consistently across regions for tracking open audit findings and reporting on the status of corrective actions; and  revising audit tracking reports to ensure that all audits with Medicaid related findings are identified and promptly reported to the regions for timely resolution.   Organizational Structure-GAO recommended that the CMS administrator establish mechanisms to help ensure accountability and clarify authority and internal control responsibility between regional office and headquarters financial managers by  including specific Medicaid financial oversight performance standards in senior managers performance agreements; and  Page 6 of 7 
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Report Title, Number, Issuer   Medicaid Financial Management:  Better Oversight of State Claims for Federal Reimbursement Needed (GAO/AIMD 02-300), GAO  "Medicaid Financial Management: Better Oversight of State Claims for Federal Reimbursement Needed" (GAO/AIMD 02-300), GAO  Corrective Action Taken or Planned by CMS  indicated that the goal in establishing the financial management workplan is to strengthen CMS Medicaid financial oversight by establishing performance expectations, track related actions and their results, and improve communication among CMSO and the regions. Finally, CMS has implemented a performance program whereby 20 top goals are developed for Medicaid and distributed in the performance plans of its executives down to the lower staff. 
re and Medicaid Services (CMS) 
ndings and Corrective Actions 
Appendix A  Summary of Recommendations per Report   developing a written plan and strategy, that clearly defines and communicates the goals of Medicaid financial oversight and responsibilities for implementing and sustaining improvements.  Page 7 of 7 
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