DEPARTMENT OF HEALTH & HUMAN SERVICES 
Centers for Medicare & Medicaid Services 
7500 Security Boulevard, Mail Stop S3-14-28 
Baltimore, Maryland 21244-1850 
 
Center for Medicaid and CHIP Services 
____________________________________________________________________________ 
 
SMD# 13-003   
 
RE:  Federal and State Oversight of Medicaid 
Expenditures 
March 18, 2013 
 
 
Dear State Medicaid Director: 
 
This letter discusses mutual obligations and accountability on the part of the state and federal 
governments for the integrity of the Medicaid program and the development, application and 
improvement of program safeguards necessary to ensure proper and appropriate use of both 
federal and state dollars. 
 
States and the Centers for Medicare & Medicaid Services (CMS) share responsibility for 
operating Medicaid programs consistent with title XIX of the Social Security Act and its 
implementing regulations.  CMS provides states with interpretive guidance to use in applying 
statutory and regulatory requirements, technical assistance including tools and data, federal 
match for their expenditures, and other resources. States fund their share of the program, and, 
within federal and state guidelines, operate their individual programs, including setting rates, 
paying claims, enrolling providers and beneficiaries, contracting with plans, and claiming 
expenditures.  States have considerable discretion in the manner in which they operate their 
programs, but should always employ that flexibility in ways that enhance care, promote overall 
program effectiveness and efficiency and safeguard dollars expended, whether originating from 
federal or state sources. Together, the federal and state governments share accountability for the 
integrity of the total investment of dollars in the Medicaid program and the extent to which that 
investment produces value for beneficiaries and taxpayers. 
 
This federal-state partnership is central to the success of the Medicaid program, but it depends on 
clear lines of responsibility and shared expectations.  To this end, CMS and the National 
Association of Medicaid Directors (NAMD) are launching an executive workgroup to focus on 
strengthening financial management and program integrity within the Medicaid program.   
The agenda and activities for the workgroup will be developed through mutual contributions 
from both federal and state partners, and will include work on areas of improvement previously 
suggested by NAMD to CMS, including better access to Medicare provider enrollment 
information, use of Medicare data for program integrity purposes, and additional work building 
on collaborative audit approaches, as well as topics generated by federal reviews, audits and 
reports.  CMS is already planning for expanded access to and training for states on the Fraud 
Investigation Database, and we will consult with the workgroup on how to best accomplish that.  Page 2  State Medicaid Director 
 
 
We anticipate that we will involve other interested stakeholders in these consultations over time.  
We hope that these conversations will help us identify innovations and opportunities for 
improved safeguards in areas of common concern; tools, resources, and training or technical 
assistance available or needed; and agreement on roles and cooperation needed between state and 
federal partners. 
 
In addition, CMS intends to establish a regular, periodic process by which we work with each 
state partner to review state expenditures, claims information, federal or state audit results, and 
other program information, to identify and discuss overall performance; potential inefficiencies, 
aberrancies, or challenges which merit attention or corrective action by the partners, and best 
practices that can be utilized by other states.  We will use these discussions to update status and 
reporting on recoveries and collections.  We intend to work with the NAMD executive group to 
formulate a common data set and approach to these conversations, which will likely include both 
state and federal reporting of utilization and payment/expenditure reviews.  We see this 
disciplined, standardized, data-driven focus on financial management and program integrity as 
an opportunity to test assumptions and interpretations, prioritize issues for further investigation, 
review progress, and measure impact, outside of normal day to day business transactions. 
 
CMS will work with states to develop richer and more frequent data analysis tools to better 
identify potential anomalies and issues of interest, building on CMS, state, and private sector 
experience in managing and using large healthcare data sets.  Over the past year, CMS has been 
developing a new data reporting framework called Transformed Medicaid Statistical Information 
System, or T-MSIS, preparation for which will begin to roll out across states this year.  T-MSIS 
will contain a more granular, timely and relevant data set of transaction and reference data from 
states than has ever been collected before at the federal level. A key use for these data is to equip 
states and the federal government with better information with which to manage the program and 
monitor integrity.  Additionally, we are also developing a new system called MACPRO, which 
will allow for the electronic submission and review of state plan amendments and waivers.  
MACPRO will offer a way to view and compare features of each states program, providing a 
critical contextual framework for the analysis of the beneficiary, provider, and payment 
information in T-MSIS.  The structured data submission required for MACPRO will also allow 
for better exposure and review of SPA content relevant to program oversight, program integrity, 
and program management. 
 
Starting in 2013, we will require states to submit upper payment limit (UPL) demonstrations on 
an annual basis.  Previously this information was collected or updated only when a state was 
proposing an amendment to a reimbursement methodology in its Medicaid state plan.  
Specifically, beginning in 2013, we will require that states submit UPL demonstrations for 
inpatient hospital services, outpatient hospital services, and nursing facilities. In 2014 and 
annually thereafter, states will be required to submit annual UPL demonstrations for the services 
listed above and clinics, physician services (for states that reimburse targeted physician 
supplemental payments), intermediate care facilities for the developmentally disabled (ICF/DD), 
private residential treatment facilities and institutes for mental disease (IMDs).   This information 
must be submitted by the state prior to the start of the state fiscal year.  For most states, this 
means that a state submits, for CMS review, these UPL demonstrations by June 30th of each year.   Page 3  State Medicaid Director 
 
For states with a fiscal year other than July 1st, their demonstrations would be submitted by the 
last day prior to the beginning of the states fiscal year.  These annual demonstrations will 
include provider specific reporting on all payments made to the providers, including 
supplemental payments.   The annual demonstrations may also be used by states to support 
ongoing compliance with the UPL as Medicaid payment changes are made throughout the year 
through the SPA process.  States will need to appropriately update the annual demonstrations to 
reflect changes in Medicaid payment levels affected by the SPA submissions.  
 
Through this process, states will also be asked as part of the submission to identify the source of 
non-federal funding for the payments described in the UPL.  This is consistent with overall 
requirements to identify sources of non-federal funding set forth in section 1903(d)(1) of the 
Social Security Act.  Such information will allow CMS and the state to have a better 
understanding of the variables surrounding rate levels, supplemental payments and total 
providers participating in the programs and the funding supporting each of the payments 
described in the UPL demonstration. Guidance concerning the format and method of UPL 
demonstration is being posted on Medicaid.gov alongside the release of this letter.  
 
We will continue to refine and formulate improvements to ensure the highest level of 
stewardship for the Medicaid program in both the federal and state governments, and know that 
our state partners are equally committed to this goal. We expect that our further consultations 
with states will lead to additional letters on this topic this year. 
 
Sincerely, 
 
/s/ 
 
Cindy Mann 
Director 
 
 
cc:  
 
CMS Regional Administrators  
 
CMS Associate Regional Administrators  
Division of Medicaid and Childrens Health Operations 
 
Matt Salo  
President 
National Association of Medicaid Directors  
 
Alan R. Weil, J.D., M.P.P.  
Executive Director  
National Academy for State Health Policy 
 
  Page 4  State Medicaid Director 
 
Ronald Smith  
Director of Legislative Affairs  
American Public Human Services Association  
 
Joy Wilson  
Director, Health Committee  
National Conference of State Legislatures  
 
William Garner 
Legislative Director 
Committee oh Health and Human Services 
National Governors Association 
 
Debra Miller  
Director for Health Policy  
Council of State Governments  
 
Christopher Gould 
Director, Government Relations  
Association of State and Territorial Health Officials