Department of Health and Human Services 

OFFICE OF 

INSPECTOR GENERAL 

WELFARE ADMINISTRATIVE COSTS 
OFFICE OF INSPE~OR GENERAL 

The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, as 

amended, is to protect the integrity of the Department of Health and Human Semites’ (HHS) 

programs as well as the health and welfare of beneficiaries served by those programs. This 

statutory mission is carried out through a nationwide network of audits, investigations, and 

inspections conducted by three OIG operating components: the Office of Audit Services, the 

Office of Investigations, and the Office of Evaluation and Inspections. The OIG also informs 

the Secretary of HHS of program and management problems and recommends courses to 

correct them. 

OFFICE OF AUDIT SERVICES 

The OIG’S Office of Audit Services (OAS) provides all auditing sefices for HHS, either by 

conducting audits with its own audit resources or by overseeing-audit work done by others. 

Audits examine the performance of HHS programs and/or its grantees and contractors in 

carrying out their respective responsibilities and are intended to provide independent 

assessments of HHS programs and operations in order to reduce waste, abuse, and 

mismanagement and to promote economy and efficiency throughout the Department. 

OFFICE OF INVESTIGATIONS 

The OIGS Office of Investigations (01) conducts criminal, civil, and administrative 

investigations of allegations of wrongdoing in HHS programs or to HHS beneficiaries and of 

unjust enrichment by providers. The investigative efforts of 01 lead to criminal convictions, 

administrative sanctions, or civil money penalties. The 01 also oversees State Medicaid fraud 

control units which investigate and prosecute fraud and patient abuse in the Medicaid program. 

OFFICE OF EVALUATION AND INSPECTIONS 

The OIGS Office of Evaluation and Inspections (OEI) conducts short-term management and 

program evaluations (called inspections) that focus on issues of concern to the Department, 

the Congress, and the public. The findings and recommendations contained in these inspection 

reports generate rapid, accurate, and up-to-date information on the efficiency, vulnerability, 

and effectiveness of departmental programs. 

This report was prepared in the Chicago Regional Office, Region V, under the direction of 

William C. Moran, Regional Inspector General and Natalie A. Coen, Deputy Regional 

Inspector General. Project staffi Jennifer Antico and W. Mark Krushat. 

For additional copies of this report, please call the Chicago regional office at (312) 353-4124. 
EXECUTIVE SUMMARY


PURPOSE 

To examine alternative funding arrangements for administrative costs in the Aid to 

Families with Dependent Children (AFDC), Medicaid and Food Stamp programs. 

BACKGROUND 

Administrative Costs 

Administrative costs are the expenses States incur to administer their programs. In 1993, 

States charged the Federal Government approximately $5.7 billion to administer three 

closely linked welfare programs, the AFDC, Medicaid, and Food Stamp programs. The 

Federal Government pays roughly half of the administrative costs for these programs, 

and State and local governments pay the remaining share. The payment system is a cost 

reimbursement system, which means that the States tell the Federal Government how 

much they have spent and the Federal Government reimburses them for roughly half 

their costs. 

Reimbursement Problems 

As we have learned from this study, as well as other studies on this topic, particularly the 

OIG report, “Reforming the System for the Determination of State and Local 

Government Administrative/Indirect Costs” (A-12-92-OO014), there are two major 

problems with this cost reimbursement system: accountability and predictability. 

The accountability issues are very basic. We are not sure what we are paying for and 

whether the funds are being spent in a cost-effective manner. The way that the current 

system operates, it would be too resource intensive to even try to find out the answers. 

We do know that some States spend double and triple what other States spend per 

recipient, without any clear relation to outcomes. There are a lot of reasons offered as 

to why this is the case, but no solid evaluated data to confirm the degree to which these 

reasons affect administrative costs. We also know that we could find no significant 

correlation between the costs incurred and the recipients served on an individual Stateby-State basis. 

The predictability issue means that the Federal Government is in the position of not 

knowing how much the States are going to charge in future years. While predictions can 

be made based on historical patterns, there is no assurance that there will not be years 

where the costs will be higher than predicted. This, in fact, has occurred in the past. 

We believe that a lack of accountability and predictability in the current cost-based 

reimbursement system are a vulnerability for the Federal Government. We believe that 

1 
the current system should be replaced by one that would provide adequate funding to the 

States, along with incentives for efficient operations and decreased oversight and 

monitoring on the part of the Federal Government. 

ALTERNATIVE FUNDING OPTIONS FOR ADMINISTRATIVE COSTS 

The primary purpose of this report is to examine alternative funding arrangements for 

the administration of the AFDC, Medicaid, and Food Stamp programs. We offer this as 

a follow-up to the broader report cited above. Here, in this report, we describe options 

that provide incentives to promote greater efficiency in the system rather than relying on 

increased monitoring and oversight activities which, in turn, add to administrative costs. 

We present five of many possible options for funding administrative costs. C)ur intention 

is to present the general concepts behind these options in order to assess the relative 

merits of each. We fully expect that if one of these options is implemented, further 

refinement and adjustment would be required. Regardless of which option is selected for 

further consideration, it should be evaluated against certain criteria. These criteria are: 

1)	 Adequacy: Funds should be adequate for the effective and efficient administration 

of these programs. 

2)	 F?&i.bilzlyand Adm.hknztive Relief The States and the Federal Government 

should have greater flexibility in using their administrative funds, and reduce the 

administrative burden by cutting back on the need for data collection and 

intensive monitoring. 

3) Chr&: The rate of growth of administrative costs should be controlled. 

4) -S Fundingdisparity among the States should be reduced. 

5)	 Bedictubility: There should be greater predictability in the system as a result of 

prospective planning and budgeting for administrative costs. 

We summarize the five alternative funding options below. 

option 1: Reduce Medicaid Special Match Rates to 50 Percent. This option would 

reduce special match rates to 50 percent for the Medicaid program, similar to the 

reduction that has occurred for the AFDC and Food Stamp programs. This option 

would result in reduced Federal expenditures for administrative costs, but would not 

reduce the administrative burden or disparity among States. It would not enhance 

predictability for budgeting purposes. 

option 2 Block GranL This option would combine the administrative costs of all three 

programs at a base year level, then provide inflationary increases each succeeding year. 

This approach would reduce the administrative burden and enhance budgeting 

predictability. It would reduce Federal costs in so far as the rate of increase under the 

ii 

— 
current system is larger than inflation. It would have no impact on the disparity among 

States. It is not flexible enough to account for changes in caseload or other special needs 

that might arise within an individual State, 

Option 3: Standard Cost Per Recipient. This option would fund each State for 

administrative costs based on a standard per recipient allocation amount. Under this 

option, the disparity among States would be addressed and the administrative burden for 

the Federal Government and the States would be reduced. This option may or may not 

generate Federal savings depending on certain factors such as the number of recipients in 

the program. In years where there is a large increase in the number of recipients, this 

option could be more costly than the current system. It would not provide for any 

special needs of one State in comparison to others. 

option4 CostPer Recipient Cap. This option imposes a cap on the Federal 

reimbursement of the cost per recipient. States would be reimbursed for their full 

recipient cost up to a set, predetermined percentage above the national median cost per 

recipient. Under this option, there would be reduced disparity between the lowest and 

highest cost States. It would allow for some differences in costs among the States, but 

not for excessive differences. Savings would be generated by reducing the amount of 

Federal administrative funds going to the highest cost States. 

@tion 5: Hat Percentage. States would be reimbursed for their administrative costs on 

the basis of their ratios of administrative cost to total program cost. This option reduces 

the administrative burden but may not reduce the disparity among States. Given the 

recent high rate of growth in program costs, the Federal Government would actually 

spend more on administrative costs under this option than it spends currently. 

CONCLUSION 

The issue of reforming the administrative cost allocation system is very relevant today 

given the considerable interest in “reinventing” Federal Government operations. If action 

is not taken, we will continue to have a system that lacks sufficient accountability and 

predictability, and relies on enhancing our monitoring capabilities. 

The alternative funding approaches that we have outlined are meant to serve as 

examples of what can be done. Furthermore, some combination of options might have a 

number of advantages. For example, the block grant alternative could be combined with 

the standard cost per recipient approach. 

This report focuses on only three of the many programs for which the Federal 

Government reimburses States for administrative costs. We focus on AFDC, Medicaid, 

and Food Stamp administrative costs because they constitute the bulk of administrative 

costs for Federal public welfare programs. However, we believe that the ultimate 

objective should be to reexamine the administrative cost allocation systems of all Federal 

programs. 

... 

111 
AGENCY COMMENTS 

We received comments on the draft report from the Assistant Secretary for Management 

and Budget, the Assistant Secretary for Planning and Evaluation, and the Assistant 

Secretary for Children and Families. They state that we have not necessarily 

demonstrated a serious problem in this area, expressed concerns about the way we 

estimated future costs and possible savings, and pointed out that there may be valid 

reasons for some disparities in costs among the States. The Administration for Children 

and Families also requested a fuller discussion of the pros and cons of the various 

funding alternatives. See full text of comments at Appendix B, The Health Care 

Financing Administration provided informal comments on earlier drafts, but did not 

provide comments on the latest one. 

We recognize the legitimate concerns that have been raised and have considered them 

carefully. We have revised the report in several places, primarily to focus more 

succinctly on the need to change the current system and to update our savings 

projections based on the latest available data. We also are including more detailed 

responses in Appendix B to the issues raised. 

At this point we believe that we have an honest disagreement about the extent of this 

problem and its appropriate solution. Perhaps this disagreement stems from differences 

in overall focus. 

The agency comments focus on whether total costs within the current system are out of 

control. There is some evidence offered, such as recent declines in cost per recipient 

data and a Ievelling off of the rate of increase in Federal costs, that there is no real 

problem here. We have reservations about the significance of these indicators and we 

address them within the report itself. More importantly though, we think that these 

indicators do not address the most important issue. 

We think that the real issue is the current cost reimbursement system itself. The system 

puts us at risk because we have difficulty knowing what we are paying for, whether it is 

cost effective, and what we will have to pay out in the future. It provides little incentive 

to economize, and is itself an inefficient system. 

Agency comments also caution that our proposals could harm some States by not taking 

into account their peculiar needs. We see similar problems of inequity with the current 

system. 

Thus, we continue to believe that the current cost reimbursement system for welfare 

administrative costs needs to be replaced for the following reasons. 

o	 Under the current system we are not sure of what we are paying for and 

whether expenditures are cost-effective. It would require a considerable 

investment in expanded auditing and monitoring to find out. These costs 

would be prohibitive especially in an environment of declining resources. 

iv 

— 
Our Office of Audit Services has reported that the current cost allocation 

system results in mountainous papexwork, labyrinthine accounting and 

detailed auditing and negotiation processes. 

o	 We can not predict with any degree of certainty under the current system 

what the States are going to charge us in the future. This issue becomes 

very important in thinking about how much the Federal Government wants 

to pay for administrative costs under welfare reform. 

o	 There is significant cost disparity among the States, without any clear 

relation to outcomes. While there are reasons offered for some disparity, 

there is no solid evaluated data that rules out efficiency as a factor in cost 

disparity. We also could find no significant correlation between 

administrative costs and numbers of recipients on an individual State-byState basis. 

For these reasons, we believe that the current cost allocation system should be replaced 

by a system that provides adequate funding for States, incentives for efficient operations, 

decreased Federal monitoring and oversight, and predictable Federal expenditures. We 

think that the options presented in this report are a good place to start in developing a 

new welfare administrative cost system. 

We want to caution the reader that the dollar estimates for the various options are 

illustrative only. In further developing a new administrative cost system, it will be 

necessary to prepare detailed estimates based on clearly defined assumptions, using the 

most recent information available. 

v 
TABLE OF CONTENTS 

PAGE	

ExEmmvE suMMARY	

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

PROBLEMS WITH THE CURRENT	

COST REIMBURSEMENT SYSTEM... . . . . . . . . . . . . . . . . . . . . . . . . . . ...5	

ALTERNATIVE FUNDING OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9


CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...18	

APPENDICES	

k Administrative Costs and Recipients, 1989-1993 . . . . . . . . . . . . . . . . . . . . . . A-1


BAgency Comments andOIG Response . . . . . . . . . . . . . . . . . . . . . . . . . . . ..B-l


C Endnotes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..C-l

INTRODUCTION 

PUIU?OSE 

To examine alternative funding arrangements for administrative costs in the Aid to 

Families with Dependent Children (AFDC), Medicaid and Food Stamp programs. 

BACKGROUND 

The AFDC program (Title IV-A) provides cash assistance to low-income families with


children in which one parent is absent or incapacitated, or to families in which the


primag earner is unemployed. The Medicaid program provides medical assistance to


low-income people who are recipients of Supplemental Security Income, current or


recent recipients of AFDC, and certain other low-income people. These programs are


administered by the Administration for Children and Families (ACF) and the Health


Care Financing Administration within the Department of Health and Human Services


(HI-E). The Food Stamp program, administered by the Food and Nutrition Service


(FNS) in the Department of Agriculture, provides redeemable coupons for food to


low-income households to enable them to buy a nutritionally adequate low-cost diet.


In 1993, States charged the Federal Government approximately $5.7 billion to


administer the AFDC, Medicaid and Food Stamp programs. The Federal


Government pays half of the administrative cost for most types of administrative


activities in all three programs and State and local governments pay the remaining


share. In general, States have considerable latitude in defining their administrative


costs. Costs need only be considered “reasonable and necessary” as outlined in OMB


Circular A-87, “Cost Principles for State and Local Governments.”1


Administrative costs are the expenses States incur to administer their programs. They


are not easily defined since States claim and categorize their administrative costs


differently. In general, however, administrative costs include such things as computer


services, transportation and salaries that are billed directly to an agency or program


and allocated costs which are shared with other agencies or programs. The majority


of administrative funds pay for staff at the State and local levels to perform a wide


variety of tasks. These activities include: the cost of determining eligibility for all


applicants, setting the allotments for eligible households, making changes in a


recipient’s status over time and other administrative tasks. Higher matching rates


have been developed for some types of expenses as an incentive for local


administrators to engage in particular administrative activities, such as statewide


comprehensive systems development, training, and some anti-fraud activities.


1

In 1986, our Office of Evaluation and Inspections published a report in response to 

questions raised about rising administrative costs. That report, entitled: “Inspectionof 

AFDC, Medicaid and Food Stamp Administrative Costs” (OAI-05-86-OOO08), examined 

the wide cost variation among States and the overall increase in cost. It suggested an 

alternative method for funding administrative costs that would reduce costs overall and 

reduce the variation between States. This proposal, however, was not implemented. 

Since 1986, other groups have made the following proposals on this issue: 

In 1987, HI-IS authored a legislative proposal to reduce the matching rates for 

administrative costs in the AFDC, Medicaid and Food Stamp programs. Under the 

proposal, matching rates were reduced for costs in excess of 125 percent of the 

median for the AFDC and Food Stamp programs and 135 percent of the median for 

Medicaid. At that time, HHS also proposed eliminating enhanced matching rates. In 

addition, the Assistant Secretary for Planning and Evaluation has examined this issue 

extensively. 

The Office of Management and Budget (OMB) proposed creating a fixed grant at the 

current Federal spending levels. In addition, it is in the process of revising circular A87, “Cost Principles for State and Local Governments,” which establishes the standards 

for determining administrative costs. 

Congress has also shown some interest in this issue. The H.R. 5552, introduced in 

July 1992 proposed a combined grant to States for administrative costs of AFDC, 

Medicaid and the Food Stamp programs. 

The Congressional Budget Oflice has also proposed combining funding to States for 

the cost of administering AFDC, Medicaid and the Food Stamp program into a single 

indexed grant.2 

In 1988, the National Association of State Budget Officers and the National 

Governor’s Association proposed their own reform measure. They proposed 

development of a combined administrative rate for the AFDC, Medicaid and Food 

Stamp programs. The rate would be based on the historic ratio of administrative 

funds to total benefit payments for each State. The goal was to reduce the papenvork 

burden and create cost savings for State and Federal Governments. They advanced 

their idea as a demonstration program, but it was not implemented. States were 

concerned that the proposal would make administrative costs vulnerable to Federal 

cost cutting measures. 

We have also been very involved in this area through our Office of Audit SeMces. 

We have worked with OMB to revise Circular A-87 and have produced numerous 

reports on this issue. Most recently we issued a report, “Reforming the System for 

Determination of State and Local Government Administrative/Indirect Costs” 

2

(A-12-92-OO014). We received about 115 comments from 22 Office of Inspectors 

General and Financial Management Offices representing 13 Federal agencies, and 

incorporated them into the report. The report describes the current system as, 

“unnecessarily burdensome to Federal, State and local govemments.”3 Furthermore, 

it suggests that, “a new system can be devised to eliminate or at least minimize, the 

mountainous papenvork, multiple cognizance arrangements, labyrinthine accounting 

and detailed auditing and negotiation processes. Such a system would benefit both the 

States and the Federal Government by reducing administrative burdens and costs.”4 

The report offers a range of options, from expanding monitoring efforts and reforming 

cost allocation guidelines to more far reaching suggestions to “dispense with the 

current arcane system and establish an equitable level of reimbursement over time.”5 

One specific proposal was to award a single administrative cost grant for public 

assistance programs. 

In addition to these past initiatives, the current Administration proposed that the 

Federal reimbursement rate be set at a uniform 50 percent for all administrative costs. 

That is, they proposed reducing the special matching rates to 50 percent. The first 

option in this report supported this proposal. Since issuing the working draft of this 

report, this option was enacted into law for the AFDC and Food Stamp program. 

Special rates remain, however, in the Medicaid program. 

SCOPE 

This inspection focuses on possible solutions to concerns specified in our Office of 

Audit Service’s report. We present five different options for funding public assistance 

administrative costs through a single grant. These represent only some of the many 

methods that might be used to fund administrative costs. Many have been proposed 

previously in various forms. We present these options again to help focus the 

discussion on the issue of administrative costs and to further clarify the costs and 

benefits to the States as well as to the Federal Government. We believe that there is 

widespread interest in improving the current system, but there is little consensus on 

how this should be done. 

This report focuses on only three of the many programs for which the Federal 

Government reimburses States for administrative costs. We focus on the AFDC, Food 

Stamp and Medicaid programs because they generate most of the administrative costs 

for federally supported public welfare programs. However, we recognize the risk that 

States may shift administrative costs to other programs (although there would be some 

practical limits as to how much cost shifting could occur). Therefore, we believe that 

the overall objective should be to re-examine the administrative cost of all Federal 

programs. The ideas presented here for the AFDC, Medicaid, and Food Stamp 

programs might well be adapted to other programs and could be used in conjunction 

with an overall reform of the cost allocation system suggested in the OffIce of Audit 

Services report. 

3

We do not include funding for Medicaid Fraud Control Units in our analysis, since, by 

law, they must be administered by State agencies independent of the ones that 

administer the Medicaid program. 

METHODOLOGY 

Pre-Ins~ection Activities


During pre-inspection, we reviewed the following materials: OMBCircular No. A-87,


Office of Inspector General (OIG) reports on administrative costs, and other materials


protided bythe&sistant SecretaV for Planning and Evaluation (SPE). In addition,


we spoke with people from the Division of Cost Allocation (regional and


headquarters), ASPE, and our Office of Audit Semites. We held an entrance


conference on September 9, 1992 with representatives from the Administration for


Children and Families, ASPE, the Department of Agriculture and other OIG staff.


Insr)ection Activities


We collected the following data on a State-by-State basis for Fiscal Year (FY) 1982 to


N 1993. Total program and administrative costs for the AFDC program were not


available for FYs 1982-1986.


Total Program (AFDC, Food Stamp, Medicaid) Budgets


Total Administrative Costs


Number of Recipients


For the purposes of this study we used State generated data provided to us by ACF, 

HCFA and FNS. We did not verify the data. We are aware that the States and the 

agencies define administrative costs and collect their data differently, thus, the data 

may not be perfectly comparable among States and between programs. Total 

recipient data, for example, are reported as an annual average number of persons 

participating in the program for the AFDC and Food Stamp programs. Alternatively, 

Medi&iid collects an annual total recipient count. While the data may not be exactly 

comparable betsveen programs, it is the best available. We feel confident that it is 

appropriate for this analysis. 

We held an exit conference on March 30, 1993 with representatives from each of the 

agencies, ASP~ and the Office of Inspector General in the Department of 

Agriculture. 

We received numerous HHS staff comments on our working draft and made many 

changes based on the advice we received. 

This inspection was, conducted in accordance with the Quality Standardr for Inspections 

issued by the President’s Council on Integrity and Efficiency. 

4 
PROBLEMS WITH THE CURRENT COST REIMBURSEMENT’ SYSTEM 

One of the primary problems with the current system is that the Federal Government 

cannot readily determine what is included in the administrative costs claimed by States. 

Furthermore, the cost to accurately determine what the funds are paying for is 

prohibitive. This would require increased Federal spending for maintaining the necessary 

monitoring systems and expanding auditing activities. 

Meanwhile, administrative costs vary considerably among States, even among those with 

similar characteristics. On the face of it, it would seem that some States are being very 

efficient and others are less efficient. Yet, no one knows for sure what the real cost 

should be. 

In short, the current method for reimbursing States for welfare administrative costs is 

unwieldy and unpredictable, both for the Federal Government and for the States. We 

believe that the current system should be replaced with one that would provide adequate 

fimding to States, along with incentives for efficient operations and decreased oversight 

and monitoring on the part of the Federal Government. 

We present five of many possible options for funding administrative costs. Under most 

of these options the States could realize greater flexibility in using their funds and 

perhaps increase efficiency in their operations. Under some options States would receive 

more equitable funding than under the current system. In addition, Federal cost 

allocation and monitoring processes could be simplified and significant savings achieved. 

The remainder of this report is divided into three sections. The first section examines 

several of the main issues inherent in the current administrative cost system. The second 

section presents five options for funding administrative costs for these three programs. 

The options are evaluated according to several criteria. The last section provides some 

final observations about the five options. 

Unexdained Dismuitv Among States 

Significant differences exist among States in their unit cost (i.e., cost per recipient) for 

administering the three programs. Table 1 lists the States alphabetically and shows the 

FYs 1989-1993 average combined cost per recipient along with each State’s average 

ranking for the same period. On average, New Jersey and Oregon have been among the 

highest cost States during our 5 year analysis period, with an average cost per person of 

$251 and $232, respectively. This is a significant contrast to States -like Texas and Illinois 

which operated at $107 and $124 per person, respectively. 

A multitude of anecdotal explanations have been offered as to why such disparities exist: 

cost-of-living differences, complexity of caseloads, stringency of eligibility requirements, 

schedule of automated systems development, differences in the delivery of program 

services, and cost allocation methodologies. In addition, some States may be operating 

5 
---------

---------

-------

-------

>>>TABLE 1<<< 

AVERAGE STATE ADMINISTRATIVE	 COST PER RECIPIENT (CPR) AND AVERAGE RANKING 

FY 1989 - FY 1993 

A labame


Alaska


Arizona


Arkansas


Cal ifornia


Colorado


Connect i cut


Delaware


Dist. of Col.


Florida


Georgia


Guam


Hawaii


Idaho


Illinois


Indiana


Iowa


Kansaa 

Kentucky 

Louisiana 

Maine 

Maryland 

Massachusetts 

Michigan 

Minnesota 

Mississippi 

Missouri 

Mont ana 

Nebraska 

Nevada 

New Hampshire 

New Jersey 

New Mexico 

New York 

North Carol ina 

North Dakota 

Ohio 

Oklahcma 

Oregon 

Pennsylvania 

Puerto Rico 

Rhode Island 

South Carol ina 

South Dakota 

Tennessee 

Texas 

Utah 

Vermont 

Virgin Islands 

Virginia 

Washington 

West Virginia 

Ui scmai n 

Uyoming 

AVERAGE 

Combined 

Average CPR 

$100.14 

323.39 

213.36 

111.66 

163.84 

142.69 

194.93 

222.04 

285.70 

124.30 

144.97 

237,54 

169.79 

209.23 

123.54 

111.22 

121.81 

135.79 

100.57 

74.45 

135.19 

186.18 

166.32 

151.68 

215.23 

65.58 

97.15 

190.04 

152.97 

188.56 

206.47 

250.79 

113.70 

247.55 

130.10 

180.33 

104.77 

198.24 

231.82 

154.65 

19.65 

114.10 

141.16 

131.30 

91.25 

106.87 

198.67 

205.61 

168.85 

160.06 

181.87 

62.26 

148.96 

193.14 

$159.30 

Average 

Rank 

48 

1 

9 

43 

25 

32 

15 

7 

2 

38 

31 

5 

22 

10 

39 

44 

40 

34 

47 

51 

35 

19 

24 

29 

8 

52 

49 

17 

28 

18 

11 

3 

42 

4 

37 

21 

46 

14 

6 

27 

54 

47 

33 

36 

50 

45 

13 

12 

23 

26 

20 

53 

30 

16 

NOTE: Federal Share Only 
much more efficiently than others. Thus, some variation between States should be 

expected due to the many differences between States. However, there is no consensus 

on how much variation should exist or the extent to which each of these factors 

influences variation. 

Burden of Accmntabilitv and oversitit 

In order to accept the contention that increased program responsibilities are leading to 

increased administrative costs, there must be data that will assure that the cost increases 

are justified. But verification through audits and other monitoring activities is extremely 

costly. In fact, our Office of Audit Services points out that efforts to veri~ State 

administrative costs may not be feasible. They emphasize that, “The auditing of costs ... 

require an enormous amount of resources, is very difficult, time consuming and labor 

intensive with little relative payoff. Even after unallowable costs are identified a 

reasonable estimate or extraordinary costing effort has to be made as to the dollar 

impact on all Federal programs at the State.”G 

In addition to veriijhg State plans, the current lack of accountability is itself a problem. 

Because of limited staff resources and significant time constraints, HHS is not able to 

make detailed reviews of all the plans. Instead, HHS must rely on State audits. There is 

concern about whether these cost allocation plans are adequately screened for 

unallowable costs being improperly charged to Federal programs. 

Questions about Costs and Workload 

Total administrative costs have risen significantly over the past 5 years, however, each of 

the three programs has grown at different rates. Between FY 1989-1993, total 

administrative costs increased 37 percent overall. This is roughly 18 percent above the 

growth due to inflation. During this period, administrative costs in the Medicaid program 

increased by 39 percent after inflation and the Food Stamp program grew by 13 percent. 

The AFDC administrative costs actually decreased by 4 percent after taking inflation into 

account (See Appendix ~ Table 1). 

The number of recipients increased much more rapidly than usual during this time 

period. In the AFDC program, the number of recipients increased by 29 percent, the 

Medicaid programs by 42 percent and the Food Stamp program by 44 percent (See 

Appendix ~ Table 2). 

One obvious conclusion from this data might be that the growth in the number of 

recipients increased administrative activities in States, thus resuhing in increased 

administrative costs. In fact, the cost of administering these programs has actually 

decreased as measured by the unit cost (cost per recipient). For example in FY 1989, 

the AFDC cost per recipient was $145 per recipient; in FY 1993 that cost had decreased 

to $107 per recipient. The Medicaid and Food Stamp programs also experienced similar 

decreases (See Appendix ~ Table 3). 

6

A more detailed analysis of the data show this to be an incomplete interpretation. It is 

important to note that the data yield different results depending on what years are 

chosen for analysis. Had we begun our analysis in FY 1987 instead of FY 1989, we 

would see that costs per recipient increased rapidly and peaked in 1989 then began to 

decrease to more typically historic levels in the Medicaid and Food Stamp programs (cost 

data was not available for the AFDC program, 1982-1986). In addition, there have been 

dramatic fluctuations in the rate of growth of recipients within the last 5 years. Growth 

rates range from 14.4 percent to 5.9 percent. 

Furthermore, a State-by-State analysis of the linkage between costs and workload on an 

annual basis demonstrates a disconnect between the amount of money being spent and 

the number of recipients. During some years, both the number of recipients and 

administrative costs increase together, however, they increase at varying rates. In other 

years administrative costs increase and recipients decrease, and there are other instances 

where recipients increase and administrative costs go down. 

The following two States are typical examples of the disconnect between administrative 

cost and recipient increases. In New Jersey for example, annual changes in 

administrative costs between 1989 and 1993 were: 13.5 percent, -5.6 percent, 19.8 

percent, 7.8 percent and -3.0 percent respectively. In comparison, the annual changes in 

the estimated unduplicated count of recipients were: -1.6 percent, 6.2 percent, 10.6 

percent 11.0 percent and 8.4 percent, respectively. Similarly, in Utah, the increase in 

administrative costs were: 9.8 percent, -5.7 percent, 19.5 percent, 21.2 percent and 2.3 

percent. Correspondingly, increases in the number of recipients were: 5.9 percent, 8.6 

percent, 13.7 percent, 8.6 percent, and 6.7 percent. 

These are not isolated examples. We calculated correlation coefficients to determine 

whether the annual changes in administrative costs are related to the changes in the 

number of recipients for each State and ternto~. The correlation coefficients fail to 

show any significant correlation between these two factors (see Appendix ~ Table 4). 

These results cause us to further question the nature and magnitude of the relationship 

between administrative costs and recipients. 

Thus, there must be factors other than number of recipients that are influencing the 

increased administrative costs. We believe that this disconnect is another indication of 

the unpredictable and somewhat unknown nature of the current administrative cost 

system. 

Proiected Administrative Costs FY 1995- FY 1999 

It is extremely difficult to estimate future costs. So much depends on underlying 

assumptions and on future events which are inherently unpredictable. 

As noted in the previous section, we were unable to correlate programmatic factors such 

as workload with administrative costs. We believe that historical cost patterns are the 

best predictors of future spending. Therefore, to estimate the level of administrative 

7 
costs under the current system to FY 1999, we took each State’s administrative cost in 

FY 1993 as the baseline amount. We then increased that baseline amount by the State’s 

average annual rate of growth in administrative costs from FYs 1989-1993 (see Table 2). 

For example, Alabama’s administrative costs grew an average of 7.4 percent annually 

from FY 1989-FY 1993. Therefore, to project Alabama’s administrative costs, we 

increased the FY 1993 amount by 7.4 percent each year until FY 1999. 

On average, administrative costs increased by about 8.7 percent for all States annually. 

We project that the total Federal share of administrative costs will be $9.5 billion in FY 

1999 (this figure is adjusted for savings achieved by the reduction in special match rates 

for the AFDC and Food Stamp programs) if the current system remains unchanged. 

This would be a 64.9 percent increase over the FY 1993 amount of $5.7 billion. 

Other factors, such as workload and inflation, will affect actual State expenditures in ways 

that we cannot easily foretell. As a result, actual expenditures under current law and 

savings under the various options we describe could be more or less than we project. 

We continue to be concerned that an open-ended cost reimbursement system, especially 

one with poorly defined cost elements, does not provide sufilcient incentives for an 

efficient and effective administrative cost system for public assistance programs. In 

addition, we believe that with renewed focus on major changes in the current welfare 

system, there will be increased pressure on administrative costs to expand. 

8

------ ----- ----- ----- ----- -----

>>> TABLE 2 <<< 

ADMINISTRATIVE COST PROJECT ION 

($ in thousands) 

FY89-93 

Avg Inc 1995 1996 1997 1998 1999 

Alabama 

Alaska 

Arizona 

Arkansas 

California 

Colorado 

Connect i cut 

Delaware 

Dist. of Col. 

Florida 

Georgia 

Hauai i 

Idaho 

Illinois 

Indiana 

I oua 

Kansas 

Kent ucky 

Louisiana 

Maine 

Maryland 

Massachusetts 

Michigan 

Minnesota 

Mississippi 

Missouri 

Mont ana 

Nebraska 

Nevada 

Ne~ Hanpsh i re 

Ne~ Jersey 

Neti Mexico 

N- York 

North Carol ina 

North Dakota 

Ohio 

Oklahoma 

Oregon 

Pennsy[ vani a 

Rhode Island 

South Carol ina 

South Dakota 

Tennessee 

Texas 

Utah 

Vermont 

Virginia 

Uash i ngton 

Uest Virginia 

Ui sconsi n 

Uyomi ng 

Guam 

Puerto Rico 

Virgin Islands 

TOTAL 

7.4% $71,078 $76,329 $81,968 $88,024 $.94,527 

14.1% 31,456 35,884 40,934 46,695 53,267 

16.2% 125,179 145,485 169,087 196,517 228,396 

8.3% 48,968 53,011 57,388 62,126 67,256 

11.1% 1,135,574 1,261,276 1,400,891 1,555,961 1,728,197 

5.7% 49,817 52,660 55,666 58,843 62,202 

3.6% 67,241 69,637 72,118 74,688 77,350 

14.5% 20,929 23,972 27,458 31,451 36,024 

41,035 43,354 45,805 48,394 51,129 

1::3 250,760 276,249 304,330 335,265 369,345 

8.0% 161,838 174,742 188,676 203,720 219,963 

4.4% 24,798 25,895 27,040 28,236 29,484 

12.2% 26,4Zf 29,696 33,312 37,368 41,918 

7.1% 258,668 276,958 296,540 317,508 339,957 

9.2% 84,405 92,184 100,680 109,959 120,094 

5.3% 43,992 46,329 48,791 51,383 54,113 

7.6% 44,646 48,050 51,713 55,656 59,900 

9.1% 96,062 104,849 114,441 124,911 136,338 

9.1% 95,074 103,757 113,232 123,573 134,858 

7.2% 29,204 31,303 33,554 35,966 38,551 

12.0% 141,346 158,309 177,308 198,586 222,418 

-0.4% 122,600 122,072 121,546 121,023 120,501 

6.6% 287,273 306,271 326,525 348,119 371,141 

13.1% 151,146 170,874 193,177 218,391 246,895 

5.2% 47,117 49,559 52,128 54,829 57,671 

8.1% 87,991 95,119 102,825 111,155 120,160 

8.8% 20,695 22,525 24,517 26,684 29,044 

30,617 32,976 35,516 38,253 41,200 

1;:2 25,755 29,660 34,158 39,337 45,302 

8.3% 18,342 19,863 21,510 23,294 25,226 

6.5% 228,234 243,065 258,859 275,681 293,595 

5.9% 34,367 36,377 38,506 40,759 43,743 

4.3% 802,607 836,891 872,639 909,915 948,782 

9.1% 135,230 147,498 160,878 175,473 191,391 

4.4% 13,468 14,065 14,688 15,339 16,019 

11.2% 256,455 285,094 316,931 352,323 391,668 

9.3% 102 #953 112,551 123,044 134,515 147,056 

8.5% 99,285 107,752 116,941 126,913 137,736 

7.2% 292,963 313,914 336,363 360,417 386,192 

3.9% 19,920 20,703 21,517 22,363 23,242 

5.4% 75,643 79,717 84,010 88,534 93,302 

8.5% 11,962 12,979 14,083 15,281 16,581 

10.1% 111,870 123,207 135,694 149,447 164,593 

11.8% 401,196 448,519 501,424 560,569 626,691 

9.4% 42,989 47,050 51,494 56,358 61,682 

11.0% 22,496 24,973 27,723 30,776 34,165 

8.6% 126,428 137,318 149,147 161,994 175,948 

16.1% 192,836 223,921 260,017 301,932 350,603 

9.5% 33,917 378133 40,652 44,506 48,725 

8.3% 99,213 107,482 116,441 126,147 136,661 

13.3% 12,595 14,268 16,163 18,309 20,741 

20. 9% 4,050 4,898 5,924 7,165 8,665 

-6.6??	 11,469 10,938 10,431 9,948 9,487 

9.1% 4,309 4,702 5,132 5,600 6,112 

8.7% $6,776,532 $7,373,865 $8,031,535 $8,756,178 $9,555,207 

Sp Hatch Savings (S80,000) ( $90. 000) ($90,000) ($90.000) ($90 , 000) 

ADJ TOTAL $6,696; 532 $7,283; 865 $7,941 ;535 $8,666; 178 $9;465;207 
ALTERNATIVE FUNDING OPTIONS 

This report is an initial step in assessing the viability of various funding options. We 

recognize that there are numerous ways of constructing options. Our intention is to 

present the general concepts behind these options in order to assess the relative merits of 

each. We fully expect that if one or more of these options is implemented, further 

refinement and adjustment would be necessary. Regardless of which option is selected 

for fin-ther consideration, it should be evaluated against certain criteria. These criteria 

are: 

1)	 A&quacy: Funds should be adequate for the effective and efficient administration 

of these programs. 

2)	 lZbibi@ und Adminhtmtive Relief: The States and the Federal Government 

should have greater flexibility in using their administrative funds, and reduce the 

administrative burden by cutting back on the need for data collection and 

intensive monitoring. 

3) C-: The rate of growth of administrative costs should be controlled. 

4) q: Fundingdisparity among the States should be reduced. 

5)	 fiedicilzbildy: There should be greater predictability in the system as a result of 

prospective planning and budgeting for administrative costs. 

The five options are: 

Reduce Medicaid Special Match Rates to 50 Percent. This option would reduce special 

match rates to 50 percent for the Medicaid program, similar to the reduction that has 

occurred for the AFDC and Food Stamp programs. 

Block Grant. This option would combine the administrative costs of all three programs 

at a base year level, then provide inflationary increases each succeeding year. 

Standard Cost Per Recipient. This option would fund each State for administrative costs 

based on a standard per recipient allocation amount. 

Cost Per RqSpient Cap. This option imposes a cap on the Federal reimbursement of 

the cost per recipient. States would be reimbursed for their full recipient cost up to a 

se~ predetermined percentage above the national median cost per recipient. 

Flat Percentage. States would be reimbursed for their administrative costs on the basis 

of their ratio of administrative cost to total program cost. 

9

Our purpose in presenting these options is to illustrate the various methods that could be


used to distribute Federal funds to the States and to estimate the potential financial


impact of each approach. We caution that the level of estimated savings are a direct


result of the assumptions made under each option. To underscore this point we


demonstrate the sensitivity of the options by testing how various assumptions under


Option 3 would affect the results (see Option 3). Policy makers wishing to either


increase or decrease grants to States for administrative costs could use these


methodologies. The important goal in our mind is to control the amount spent, to relate


it to programmatic goals, and to eliminate administrative costs and burdens in dispensing


the Federal funds.


In the following analysis we describe each of the five options, provide State level


examples of the financial impact, and assess the strengths and weaknesses of each option


according to the five criteria listed above:


OPTION 1: REDUCE MEDICAID SPECIAL MATCH TO 50 PERCENT


Since the development of this option, the special match rates for the AFDC and Food


Stamp programs has been reduced to 50 percent. This affects all five options equally by


reducing the amount of savings still achievable by about $80 million in FY 1995 and $90


million in each subsequent year. 7 We adjusted for these savings in all our option


calculations.


Special matching rates have been provided to States to encourage specific administrative


activities. In the AFDC program, for example, the Family Assistance Management


Information System was reimbursed at 90 percent, the Systematic Alien Verification for


Entitlement at 100 percent, and control of fraud and abuse at 75 percent. The Medicaid


program has similar types of special matching provisions. (NOTE: Funding for Medicaid


Fraud Control Units matched at 90 percent start-up and 75 percent operating costs is not


included in our analysis since by law this program is operated independently of the State


agency that administers the Medicaid program.)


one alternative for funding administrative costs is to reduce the special matching rates


that exist for some activities in the Medicaid program to 50 percent. For example, the


development and operation of management information systems is currently funded


anywhere from 75 to 90 percent for Medicaid. Option 1 considers reducing these special


matching rates to a uniform 50 percent (see Table 3).


To calculate administrative costs under this option, we first determined the proportion of


administrative costs eligible for the special match rates for each State. Then we reduced


the Federal reimbursement rate to 50 percent.


10

Impact 

Adequacy There would be impact on a portion of Medicaid administrative costs. Costs 

reimbursed at the special matching rates accounted for 27.9 percent of all Medicaid 

administrative funds in FY 1993; 72.1 percent would remain unaffected. Of the three 

programs, Medicaid administrative costs would be affected more than the other two 

programs since it has the largest proportion of special matching rates. 

The impact on special matching rate activities is unclear. Special match rates were 

provided to encourage States to initiate cost saving activities. Since many of these cost 

saving activities (e.g. development of MIS systems) are largely in place, these special 

rates may no longer be necessaxy. However, eliminating the special match rates may 

reduce State investment in cost saving activities. 

Flexibility and Administrative Reliefi This option would have virtually no impact on 

Federal and State administrative burdens. The cost allocation system would remain the 

same except that all administrative costs would be reimbursed at 50 percent. States 

would gain no additional flexibility since reimbursement and reporting requirements 

would not change. 

Costs: Based on historical data through FY 1993, we project this option would reduce 

the Federal share of administrative costs by approximately $2.3 billion from FYs 1995-

1999.. The savings could increase or decrease depending on the total amount which 

States choose to spend in categories affected by the higher rates. 

Disparity The funding gap among States would not be affected for the majority of 

administrative costs. States funding levels would decrease proportionate to the amount 

spent on activities matched at the higher rates. 

Predictability This option would not introduce any additional predictability into the cost 

allocation system since it would remain essentially unchanged. 

11

>>> Table 3eec 

REDUCE MEDICAID SPECIAL MATCH RATES 

Total Medicaid 

Administrative 

Costs (Projected) 

Amount Provided 

at Special Match 

Rates 

Special Match 

($ in millions) 

FY 1995 FY 1996 FY 1997 FY 1998 FY 1999 

$3,502 $4,022 $4,632 $5,350 $6,200 

$977 $1,122 $1,292 $1,493 $1,730 

Rates Reduced to $644 $739 $851 $983 $1,139 

50 Percent 

Savings $333 $383 $441 $510 $591 

OPTION 2 BLOCK GRANT 

Under Option 2, the Federal Government would provide a block grant to each State to 

cover administrative expenses for all three programs. For illustrative purposes, we used 

an approach that combines the administrative costs for the three programs at their FY 

1993 levels, then provides an allowance for inflation in subsequent years (see Table 4). 

To calculate the Federal share of administrative expenditures under a block grant 

approach, we combined administrative costs at the FY 1993 levels. Then we increased 

the block grant for inflation. We adjusted for savings already realized by the AFDC and 

Food Stamp programs by the reduction in special matching rates by subtracting the 

estimated savings amount from total administrative costs. 

lmlXK.1 

Adequacy The block grant option does not reduce the baseline amount that States are 

currently receiving. It holds the rate of increase to the rate of inflation. Policy and 

program officials should select the base year and growth rate that will ensure adequate 

funding for States. This approach might need some mechanism to occasionally adjust 

funding for overall program changes. For example, if States generally experience a 

significant increase in recipients, the block grant might be increased to cover larger 

administrative costs. Even with such an overall adjustment, the block grant approach 

does not automatically adjust funding levels to States based on State specific cost 

12 
----------------------------------------------------------------

--------------------------------------------

>>> TABLE 4 <<< 

BLOCK GRANT 

($ in thousands) 

FY95 Ackn FY96 A& FY97 Adm ----.----- ---.------ FY98 A& FY99 Acin 

$72,077 $74,528 

28,159 29,117 

107,954 111,625 

48,673 50,328 

A 1abams 

Alaska 

Arizona 

Arkansas 

California 

Colorado 

Connect i cut 

Dela~are 

Dist. of Col. 

Florida 

Georgia 

Hauai i 

Idaho 

Illinois 

Indiana 

Iowa 

Kansas 

Kentucky 

Louisiana 

Maine 

Maryland 

Massachusetts 

Michigan 

Minnesota 

Mississippi 

Missouri 

Montana


Nebraska


Nevada


Ne~ Haqxh i re


Neu Jersey


New Mexico


Neu York


North Carol ina


North Dakota


Ohio


Oklahc+ns


Oregon


Pennsylvania a


Rhode Island


South CaroL i na


South Dakota


Tennessee


Texas


Utah


Vermont


Virginia


Uash i ngton


Uest Virginia


Uisconsin


Uyomi ng


Guam


Puerto Rico


Virgin Islands


TOTAL


Sp Match Saving


AD.I TOTAL


%5,325 %7,480 S69, 707 

25,595 26,389 27,260 

98,125 101,167 104,506 

44,241 45,613 47,118 

974,669 1,004,884 1,038,045 1,072,300 1,108,759 

47,205 48,669 50,275 51,934 53 #700 

66,382 68.440 70,698 73,031 75,515 

16,891 17;414 17,989 18,583 19,214 

38,924 40,131 41,455 42,823 44,279 

218,776 225; 559 233,002 240,691 248,875 

146,986 151,543 156,544 161,710 167,208 

24.081 24.827 25,647 26,493 27,394 

22; 276 22; 967 23,725 24,508 25,341 

2388909 246.315 254,444 262,840 271,777 

74,924 77; 247 79,796 82,429 85,232 

42,000 43,301 44, i30 46,207 47,778 

40.812 42.077 43 #466 44,900 46,427 

85; 378 88;025 90,930 93,930 97,124 

84,525 87,146 90,021 92,992 96,154 

26,914 27,748 28,664 29,610 30,616 

119,309 123,007 127,066 131,260 135,722 

130.940 134,999 139,454 144,056 148,954 

267;611 275,907 285,012 294,417 304,427 

125.219 129,100 133,361 137,761 142,445 

45; 094 46,492 48,026 49,611 51,298 

79,728 82,199 84,912 87,714 90,696 

18,497 19.071 19,700 20,350 21,042 

27,946 28;813 29,764 30,746 31,791 

20,562 21,199 21,899 22,622 23,391 

16,561 17; 074 17,638 18,220 18,839 

213,071 219,677 226,926 234,415 242,385 

32,477 33,484 34,589 35,730 36,945 

781,631 805,861 832,455 859,926 889,163 

120,360 124,091 128,186 132,416 136,918 

13,076 13,481 13,926 14,386 14,875 

219,729 226,541 234,017 241,739 249,958 

91.211 94.039 97,142 100,347 103,759 

89;255 92; 022 95,058 98,195 101,534 

270,177 278,553 287,745 297,241 307,347 

19,527 20,132 20,797 21,483 22,213 

72,117 74,352 76,806 79,340 82,038 

10.758 11.091 11,457 11,835 12,238 

97;655 100;682 104,004 107,437 111,089 

339,890 350,427 361,991 373,936 386,650 

38,001 39,179 40,472 41,807 43,229 

19,328 19,927 20,585 21,264 21,987 

113.476 116,993 120,854 124,842 129,087 

151;427 156,122 161,274 166,596 172,260 

29,963 30.892 31,911 32,964 34,085 

89,507 92;282 95,327 98,473 101,821 

10,392 10,715 11,068 11,433 11,822 

2; 932 3,023 3,123 3,226 3,335 

13;352 13,766 14,220 14,690 15,189 

3,830 3,949 4,079 6,214 48357 

$6,077,547 $6,266,081 S6,472,862 $6,686,536 $6,913,878 

($80, 000 ) ($90,000) ($90,000) ($90 , 000) ($90,000) 

$.5,997,547 %,176,081 $6,382,862 $6.596,536 %,823,878 
problems. For example if one State experienced a significant cost increase for ADP


equipment its share of the block grant would not increase automatically.


F’lexiiility and Administrative Reliefi States’ administrative burden would be significantly


reduced. States would have less reporting requirements to the Federal Government since


they would have the responsibility for, and control the use of, funds for administrative


activities. This, in turn, would reduce the cost and administrative burden of oversight and


monitoring by the Federal Government.


CQStx Based on historical data through FY 1993 and using FY 1993 as the base year for


calculating inflationary adjustments, we project Federal savings of $8.1 billion by FY


1999. This alternative produces the greatest savings of all the options. Savings are


generated by reducing the rate of growth in administrative costs to the level of inflation.


This is significantly lower than the estimated 9 percent annual rate of increase under the


current system (see Table 2). As noted earlier, this estimate of savings is very sensitive


to assumptions regarding inflation and State fiscal policies, both of which are difficult to


predict. They are also sensitive to the discretionary features of the block grant


mechanism itself. For example, savings could be greatly decreased or increased by


choosing a higher or lower base amount for the start-up year. Or, some factor other


than inflation could be used to annually increase the appropriation. In fact, those factors


could be used to increase the amount available to States for administrative costs. The


key here is that the block grant mechanism allows policy makers to decide how much


they want to spend for administration and to efficiently distribute the funds to the States.


~parity This option does not address any funding disparities that may currently exist


among the States since it freezes their administrative funding at the FY 1993 level. Some


low cost States may be operating programs below desired staffing levels because of


current budget constraints, but plan to hire more staff to better administer their


programs. Alternatively, this approach does nothing to limit Federal reimbursement to


States that may be operating excessively costly programs, in essence, rewarding them by


locking in higher levels of funding.


Predictability A block grant option would greatly enhance predictability since the annual


increase would grow at the rate of inflation.


OPTION 3: SMNDARD COST PER RECIPIENT 

Option 3 funds each State’s administrative costs on the basis of a standardized cost per 

recipient (CPR). Though there are numerous ways to calculate a standard cost per 

recipien~ ours is based on the average cost per recipient for FY 1989-FY 1993 (see 

Table 5). 

Specifically, we calculated the overall State average of the cost per recipient for each 

year from FYs 1989-1993. This average cost per recipient served as the standard cost 

per recipient for the baseline year of FY 1993. It was increased by inflation in 

subsequent years. It was also adjusted to compensate for differences in labor costs 

13 
----------------------------

----------------------

----------------------------

---------------------------- ---

---------------------------

---------------------------

---------------------------

---------------------------

>>> TABLE 5 <<< 

STANDARDIZED COST PER RECIPIENT 

1995 

Ver 1 Ver 2 Ver 3 . . . . . . 

Standard Cost 

Per Recipient $168.35 $168.35 $168.35 

Recipients 

(in millions) 46.3 42.7 39.5 

Estimated Savings ($943 ) (s339) S171 

(S in millions) 

NOTES: 

1996 

Ver 1 Ver 2 Ver 3 

$173.73 S173.73 S173.73 

50.3 44.5 39.5 

(S1,269) (S259) S557 

1997 ,.------------- -.-----------

Ver 1 Ver 2 Ver 3 ,----------------------.. 

S179.29 S179.29 S179.29 

54.8 46.3 39.5 

(S1 ,671) (s166) S996 

1998 . 

Ver 1 Ver 2 Ver 3 

. 

S185.03 S185.03 S185.03 

59.9 48.3 39.5 

(s2,166) (S56) S1,496 

1999 

Ver 1 Ver 2 Ver 3 

S190.95 S190.95 $190.95 

65.7 50.5 39.5 

(S2,779) S72 S2 ,063 

Version 1 uses estimates of recipients based on the increase over the pest 5 years 

Version 2 uses estimates of recipients based on the increase over the &st Il”years. 

Version 3 holds the ntmber of recipients constant at the FV 1993 level. 
between states. We used the Bureau of Labor Statistic’s listing of State wage levels for 

government employees to adjust the standard cost per recipient for these differences. 

Our cost per recipient figure uses an estimated, unduplicated count of the number of 

recipients for all three programs. Unfortunately, none of the three agencies currently 

collects unduplicated recipient information. Therefore we estimated it using information 

from the Sumev of Income and Program Participation, which is administered by the 

Bureau of the Census.8 If adopted, this option would require that States report their 

unduplicated count of recipients: As a result, current data systems may need to be 

improved. However, other per recipient approaches may not require an unduplicated 

count. 

To illustrate the sensitivity of these calculations, we varied our method for projecting 

future numbers of recipients. As shown on Table 5, we calculated three different 

recipient projections; one was based on the historical increase over the past 5 years, 

another was based on the historical increase from the past 11 years, and the third holds 

recipients constant at the 1993 level. The cost per recipient remained constant in each 

version of this option. 

We adjusted for savings already realized by the AFDC and Food Stamp programs by the 

reduction in special matching rates by subtracting the estimated savings amount from 

total administrative costs. 

lE!Pf@ 

Adequacy States that have a cost per recipient level higher than the standard amount 

will experience a reduction in Federal funding compared to their current baseline 

amount. This could be a real disadvantage if their current higher funding is the result of 

unique cost problems not experienced by other States who spend less per recipient. 

Though we used a historical baseline, policy makers could select a standard amount and 

growth rates based on many different factors to ensure adequate funding for States. One 

advantage is that policy makers can be very explicit about the types of activities they are 

including in the rate and the level of funding that will be provided for these activities. In 

addition, a standard rate may generate incentives for greater efilciency among the States. 

I?lexiiility and Administrative Reliefi Like the block grant option, a standard cost per 

recipient approach gives States the responsibility for, and control of, their administrative 

funds. A standard cost per recipient approach would relieve much of the administrative 

burden on States since they would no longer have to maintain their cost allocation 

processes for these three programs. This approach has an advantage over the block 

grant (Option 2) since it automatically adjusts according to the number of recipients. 

Costx Based on the number of recipients, this options would either cost or save Federal 

funds. The three versions of this option produced dramatically different results in terms 

of estimated savings. Version 1 us& recipient estimates based on the recipient increase 

over the past 5 years, it results in an increased cost to the Federal Government of $8.8 

14 
billion between FY 1995 and FY 1999. Version 2 uses recipient estimates based on the 

recipient increase over the past 11 years, it results in an increased cost to the Federal 

Government of $748 million between FY 1995 and FY 1999. Version 3 holds the 

number of recipients constant at the FY 1993 level and results in a savings to the Federal 

Government of $5.1 billion between FY 1995 and FY 1999. It is clear from these figures 

that it is critical to consider the sensitivity of the data to the underlying assumptions when 

assessing each of the options. 

Disparity This option directly addresses the funding disparity among States because all 

States receive the same amount of funding per recipient. For example, the actual cost 

for New Jersey in FY 1993 was $227 per recipient, versus $99 for Florida. Under a 

standard cost per recipient approach, New Jersey and Florida would receive the same, 

standard per recipient amount with adjustments for differences in labor costs. 

Predictability Like the block grant option, this approach would greatly enhance the 

ability to plan and budget for administrative costs prospectively. 

OPTION 4 CAP 

Option 4 imposes a cap on the Federal reimbursement of the cost per recipient. Each 

year, States would be reimbursed up to a percentage above the median cost per recipient 

for all States (see Tables 6 and 7). 

Based on our analysis of administrative growth under the current system, we first 

determined the amual cost per recipient for each State. Then we determined the 

annual median cost per recipient to calculate the cap amount. Next, the cap was applied 

to individual State costs per recipient. To illustrate the impact that different cap levels 

might have on States, we considered two cap levels: 150 percent of the national median, 

and 125 percent of the national median. Under this approach, States that have 

administrative costs in excess of the cap would receive only the cap amount. States that 

have a cost per recipient below the cap would receive their actual cost. 

We adjusted for savings already realized by the AFDC and Food Stamp programs by the 

reduction in special matching rates by subtracting the estimated savings amount from 

total administrative costs. 

Im12a!a


Adequaw This funding approach would Impact the highest cost States since their 

administrative costs would not be fully covered. With a 150 percent cap, we estimate 

that 7 States would be affected in FY 1999. With a 125 percent cap, 21 States would be 

affected in FY 1999. The number of States affected by a cap vary in any given year. 

Compared to the previous option, this one offers more of a compromise between the 

need to reduce disparity of funding among the States while still allowing for legitimate 

differences. It allows for some variation but not for extensive differences. 

15

-----------------------------

------ ------ ------

----------------------------------------------------------------------------------------------------------------------

------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------

>>> TABLE 6 <<< 

15W COST PER RECIPIENT CAP 

(CPR in dollars, A&I in thousands) . 

1995 150% 1995 1996 150% 1996 1997 150% 1W7 19% 150% 1998 1999 15UX 1999 

CPR CPR CAP Ackn CPR CPR CAP Adm CPR CPR CAP Acin CPR CPR CAP Acin CPR CPR CAP Adm .-----

Alabama 95.94 $95.94 $71,078 96.30 $96.30 $76,329 96.66 $96.66 $81,968 97.03 $97.03 $88,024 97.39 $.97.39 $94,527 

A(aska 323.01 218.25 21,254 326.85 216.04 23,718 330.74 219.98 27,226 334.67 227.45 31,735 338.65 230.54 36,262 

Arizona 126.73 126.73 125,179 112.61 112.61 145,485 100.05 100.05 169,087 88.90 88.90 196,517 78.99 78.W 228,396 

Arkansas 118.26 118.26 48,968 120.93 120.93 53,011 123.67 123.67 57,388 126.48 126.48 62,126 129.34 129.34 67,256 

California 181.67 181.67 ,735,574 187.30 187.30 ,261,276 193.10 193.10 1,400,891 199.08 IW.08 1,555,961 205.25 205.25 1,728,197 

Co 1orado 120.78 120.78 49,817 119.05 119.05 52,660 117.33 117.33 55,666 115.64 115.64 58,843 113.98 113.98 62,202 

Connect i cut 145.50 145.50 67,241 136.03 136.03 69,637 127.18 127.18 72,118 118.90 118.90 74,688 111.16 111.16 77,350 

Delaware 201.10 201.10 20,929 204.32 204.32 23,972 207.59 207.59 27,458 210.91 210.91 31,451 214.29 214.29 36,024 

Dist. of Col. 251.57 218.25 35,600 250.56 216.04 37,381 249.55 219.98 40,377 248.55 227.45 44,286 247.55 230.54 47,617 

Florida 85.41 85.41 250,760 79.35 79.35 276,249 73.72 73.72 304,330 68.49 68.49 335,265 63.62 63.62 369,345 

Georgia 113.57 113.57 161,838 109.93 109.93 174,742 106.41 106.41 188,676 103.00 103.00 203,720 W.70 W.70 219,963 

Haua i i 157.63 157.63 24,798 156.63 156.63 25,895 155.65 155.65 27,040 154.66 154.66 28,236 153.69 153.69 29,484 

Idaho 206.19 206.19 26.473 210.21 210.21 29,696 214.30 214.30 33,312 218.47 218.47 37,368 222.73 222.73 41,918 

ILlinois 139.33 139.33 258; 668 144.00 144.00 276,958 148.84 148.84 296,540 153.83 153.83 317,508 158.99 158.W 339,957 

Indiana 101.06 101.06 84,405 99.18 99.18 92,184 97.33 97.33 100,680 95.52 95.52 109,959 93.74 93.74 120,094 

1 ona 133.79 133.79 43,992 136.98 136.98 46,329 140.25 140.25 48,791 143.60 143.60 51,383 147.02 147.02 54,113 

Kansas 140.07 140.07 44.646 140.08 140.08 48,050 140.10 140.10 51,713 140.11 140.11 55,656 140.12 140.12 59,900 

Kent ucky 117.89 117.89 96; 062 121.61 121.61 104,849 125.44 125.44 114,441 129.39 129.39 124,911 133.47 133.47 136,338 

Louisiana 91.43 91.43 95,074 95.38 95.38 103,757 99.49 W.49 113,232 103.79 103.79 123,573 108.27 108.27 134,858 

Maine 126.01 126.01 29,204 125.04 125.04 31,303 124.08 124.08 33,554 123.13 123.13 35,966 122.18 122.18 38,551 

Mary 1and 223.12 218.25 138,261 233.14 216.04 146,696 243.61 219.98 160,106 254.56 227.45 177,439 265.99 230.54 192,773 

Massachusetts 131.63 131.63 122,600 122.41 122.41 122,072 113.84 113.84 121,546 105.87 105.87 121,023 98.46 98.46 120,501 

Michigan 181.08 181.08 287,273 189.42 189.42 306,271 198.15 198.15 326,525 207.28 207.28 348,119 216.84 216.84 371,141 

Minnesota 277.05 218.25 119.069 298.33 216.04 123,Z$9 321.26 219.98 132,277 345.94 227.45 143,588 372.52 230.54 152,795 

Mississippi 68.90 68.90 47;117 70.27 70.27 49,559 71.66 71.66 52,128 73.09 73.09 54,829 74.54 74.54 57,671 

Missouri 96.45 96.45 87,991 96.07 96.07 95,119 95.69 95.69 102,825 95.31 95.31 111,155 94.93 94.93 120,160 

Mont ana 187.44 187.44 20,695 196.85 196.85 22.525 206.74 206.74 24,517 217.12 217.12 26,684 228.02 228.02 29,044 

Nebraska 157.44 157.44 30,617 159.90 159.90 32;976 162.40 162.40 35,516 164.94 164.94 38,253 167.52 167.52 41,200 

Nevada 157.34 157.34 25,755 151.90 151.90 29,660 146.65 146.65 34,158 141.58 141.58 39,337 136.69 136.69 45,302 

New Hanqxhi re 136.29 136.29 188342 120.47 120.47 19,863 106.49 106.49 21,510 94.13 94.13 23,294 83.20 83.20 25,226 

Neu Jersey 225.04 218.25 221.344 224.13 216.04 234,287 223.23 219.98 255,093 222.33 222.33 275,681 221.43 221.43 293,595 

New Mexico 87.19 87.19 34; 367 81.49 81.49 36,377 76.16 76.16 38,506 71.18 71.18 40,759 66.52 66.52 43,143 

Neu York 230.81 218.25 758,923 229.85 216.04 786,614 228.89 219.98 838,676 227.93 227.45 907, Wo 226.98 226.98 948,782 

North Carolina 106.49 106.49 135.230 102.34 102.34 147.498 98.35 98.35 160,878 94.52 94.52 175,473 90.83 90.83 191,391 

North Dakota 175.02 175.02 13:468 172.23 172.23 14;065 169.49 169.49 14,688 166.80 166.80 15,339 164.15 164.15 16,019 

Ohio 127.97 127.97 256,455 136.46 136.46 285,094 145.51 145.51 316,931 155.16 155.16 352,323 165.46 165.46 391,668 

Oklahoma 187.54 187.54 102,953 190.56 190.56 112,551 193.64 193.64 123,044 196.77 196.77 134,515 IW.94 199.94 147,056 

Oregon 219.10 218.25 98,897 219.09 216.04 106,250 219.08 219.08 116,941 219.07 219.07 126,913 219.06 219.06 137,736 

Pennsylvania 171.47 171.47 292,963 177.74 177.74 313,914 184.24 184.24 336,363 190.99 190.99 360,417 197.97 197.97 386,192 

Rhode Island 85.98 85.98 19,920 79.40 79.40 20,703 73.32 73.32 21,517 67.71 67.71 22,363 62.53 62.53 23,242 

South Carol ina 117.73 117.73 75.643 113.32 113.32 79.717 109.07 109.07 84,010 104.98 104.98 88,534 101.05 101.05 93,302 

South Oakota 139.28 139.28 11;962 143.28 143.28 12;979 147.40 147.40 14,083 151.63 151.63 15,281 155.98 155.98 16,581 

Tennessee 85.11 85.11 111,870 84.05 84.05 123,207 82.99 82.99 135,694 81.95 81.95 149,447 80.93 80.93 164,593 

Texas 102.72 102.72 401,196 101.41 101.41 448.519 100.13 100.13 501,424 98.85 98.85 560,569 97.59 97.59 626,691 

Utah 205.97 205.97 42;989 207.38 207.38 47;050 208.80 208.80 51,494 210.23 210.23 56,358 211.67 211.67 61,682 

Vermont 210.62 210.62 22,496 212.90 212.90 24,973 215.20 215.20 27,723 217.52 217.52 30,776 219.87 219.87 34,165 

Virginia 149.70 149.70 126,428 147.15 147.15 137,318 144.63 144.63 749,147 142.16 142.16 161,994 139.74 139.74 175,948 

Washington 222.30 218.25 189,322 237.37 216.04 203,803 253.45 219.98 2::, :g 270.63 227.45 253,758 288.97 230.54 279,711 

Uest Virginia 72.39 72.39 33,917 74.84 74.84 37,133 77.38 77.38 80.00 80.00 44,506 82.72 82.72 48,725 

Ui sconsi n 174.71 174.71 99,213 186.95 786.95 107,482 200.05 200.05 116;441 214.06 214.06 126,147 229.05 229.05 136,661 

Uyomi ng 197.13 197.13 12,595 202.09 202.09 14,268 207.17 207.17 16,163 212.38 212.38 18,309 217.73 217.73 20,741 

Guam 397.78 218.25 2:222 466.53 216.04 2.268 547.16 219.98 2,382 641.73 227.45 2,539 752.65 230.54 2,654 

Puerto Rico 26.75 26.75 11;469 27.61 27.61 10;938 28.50 28.50 10,431 29.41 29.41 9,948 30.36 30.36 9,487 

Virgin islands 258.81 218.25 3,633 286.13 216.04 3,550 316.34 219.98 3,569 349.74 227.45 3,642 386.66 230.54 3,644 

10TAL 

Special Match 

ADJ TOTAL 

S158.73 

,ings 

$150.47 $6,668,757 

(80,000) 

$6,588,757 

S161 .40 S150.07 $7,212,524

(90,000) $7,122,524 

$164.60 $151.00 $7,857,125 

(90,000) 

$7,767,125 

$168.36 $152.55 $8,584,479 

(90,000) 

$8,494,479 

$172.75 $153.51 $9,331,573 

(90,000) 

$9,241,573 
--------------------------------- -------- -------- -----------------------------------------------------------------------------------------------------

------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------

>>> TABLE 7 <<< 

125% COST PER RECIPIENT CAP 

(CPR in dol(ars, Ah in thousands) . 

1995 125% 1995 1996 125% 1996 1997 125% 1997 1998 125% 1998 1999 125% 1999 

CPR CPR CAP Ackn CPR CPR CAP Adm CPR CPR CAP Ah CPR CPR CAP Acin CPR CPR CAP Adm 

A 1abama 95.94 $95.94 $71,078 96.30 $96.30 $76,329 96.66 $96.66 $81,968 97.03 $97.03 $.88,024 97.39 $97.39 $94,527 

Alaska 323.01 181.88 17,713 326.85 180.00 19,762 330.74 183.31 22,688 334.67 189.54 26,446 338.65 192.11 30,217 

Arizona 126.73 126. Z3 125,179 112.61 112.61 145,485 100.05 100.05 169,087 88.90 88.90 196,517 78.99 78.99 228,396 

Arkansas 118.26 118.26 48,968 t20.93 120.93 53,011 123.67 123.67 57,388 126.48 126.48 62,126 129.34 129.34 67,256 

California 181.67 181.67 1,135,574 187.30 180.00 1,212,143 193.10 183.31 1,329,865 199.08 189.54 1,481,366 205.25 192.11 1,617,526 

Colorado 120.78 120.78 49,817 119.05 119.05 52,660 117.33 117.33 55,666 115.64 115.64 58,843 113.98 113.98 62,202 

Connect i cut 145.50 145.50 67,241 136.03 136.03 69,637 127.18 127.18 72,118 118.90 118.90 74,688 111.16 111.16 77,350 

Delaiiare 201.10 181.88 18,928 204.32 180.00 21,119 207.59 183.31 24,246 210.91 189.54 28,264 214.29 192.11 32,296 

Dist. of Col. 251.57 181.88 29,667 250.56 180.00 31,145 249.55 183.31 33,646 248.55 189.54 36,905 247.55 192.11 39,679 

Florida 85.41 85.41 250,760 79.35 79.35 276,249 73.72 73.72 304,330 68.49 68.49 335,265 63.62 63.62 3698345 

Georgia 113.57 113.57 161,838 109.93 109.93 174,742 106.41 106.41 188,676 103.00 103.00 203,720 99.70 99.70 219,963 

Hanai i 157.63 157.63 24,798 156.63 156.63 25,895 155.65 155.65 27,040 154.66 154.66 28,236 153.69 153.69 29,484 

Idaho 206.19 181.88 23,352 210.21 180.00 25,429 214.30 183.31 28,495 218.47 189.54 32,419 222.73 192.11 36,156 

Illinois 139.33 139.33 258,668 144.00 144.00 276,958 148.84 148.84 296,540 153.83 153.83 317,508 158.99 158.99 339,957 

Indiana 101.06 101.06 84,405 99.18 99.18 92,184 97.33 97.33 100,680 95.52 95.52 109,959 93.74 93.74 120, D94 

1owa 133.79 133.79 43,992 136.98 136.98 46,329 140.25 140.25 48,791 143.60 143.60 51,383 147.02 147.02 54,113 

Kansas 140.07 140.07 44,646 140.08 140.08 48,050 140.10 140.10 51,713 140.11 140.11 55,656 140.12 140.12 59,900 

Kentucky 117.89 117.89 96,062 121.61 121.61 104,849 125.44 125.44 114,441 129.39 129.39 124,911 133.47 133.47 136,338 

Louisiana 91.43 91.43 95,074 95.38 95.38 103,757 99.49 99.49 113,232 103.79 103.79 123,5i3 108.27 108.27 134,858 

Maine 126.01 126.01 29,204 125.04 125.04 31,303 124.08 124.08 33,554 123.13 123.13 35,966 122.18 122.18 38,551 

Maryland 223.12 181.88 115,221 233.14 180.00 122,224 243.61 183.31 133,417 254.56 189.54 147,864 265.99 192.11 160,639 

Massachusetts 131.63 131.63 122,600 122.41 122.41 122,072 113.84 113.84 121,546 105.87 105.87 121,023 98.46 98.46 120,501 

Michigan 181.08 181.08 287,273 189.42 180.00 291,037 198.15 183.31 302,069 207.28 189.54 318,321 216.84 192.11 328,821 

Minnesota 277.05 181.88 99,227 298.33 180.00 103,097 321.26 183.31 110,227 345.94 189.54 119,656 372.52 192.1’I 127,324 

Mississippi 68.90 68.90 47,117 70.27 70.27 49,559 71.66 71.66 52,128 n.09 73.09 54,829 74.54 74.54 57,671 

Missouri 96.45 96.45 87,991 96.07 96.07 95,119 95.69 95.69 102,825 ‘95.31 95.31 111,155 94.93 94.93 120,160 

Mont ana 187.44 181.88 20,082 196.85 180.00 20,597 206.74 183.31 21, ~8 217.12 189.54 23,295 228.02 192.11 24,469 

Nebraska 157.44 157.44 30,617 159.90 159.90 32,976 162.40 162.40 35,516 164.94 164.94 38,253 167.52 167.52 41,200 

Nevada 157.34 157.34 25,755 151.90 151.90 29,660 146.65 146.65 34,158 141.58 141.58 39,337 136.69 136.69 45,302 

New Hanpshire 136.29 136.29 18,342 120.47 120.47 79,863 106.49 106.49 21,510 94.13 94.13 23,294 83.20 83.20 25,226 

New Jersey 225.04 181.88 184,459 224.13 180.00 195,203 223.23 183.31 212,570 222.33 189.54 235,026 221.43 192.11 254,722 

New Mexico 87.19 87.19 34,367 81.49 81.49 36,377 76.16 76.16 38,506 71.18 71.18 40,759 66.52 66.52 43,143 

New York 230.81 181.88 632,453 229.85 180.00 655,390 228.89 183.31 698,872 227.93 189.54 756,652 226.98 192.11 803,025 

North Carolina 106.49 106.49 135,230 102.34 102.34 147,498 98.35 98.35 160,878 94.52 94.52 175,473 90.83 90.83 191,391 

North Dakota 175.02 175.02 13,468 172.23 172.23 14,065 169.49 169.49 14,688 166.80 166.80 15,339 164.15 164.15 16,019 

Ohio 127.97 127.97 256,455 136.46 136.46 285,094 145.51 145.51 316,931 155.16 155.16 352,323 165.46 165.46 391,668 

Oklahoma 187.54 181.88 99,848 190.56 180.00 106,3?2 193.64 183.31 116,480 196.77 189.54 129,576 199.94 192.11 ; ::, ;;; 

Oregon 219.10 181.88 82,417 219.09 180.00 88,526 :;. l)) 183.31 97,847 219.07 189.54 109,807 219.06 192.11 

Pennsylvania 171.47 171.47 292,963 177.74 177.74 313,914 183.31 334,657 190.99 189.54 357,689 197.97 192.11 374; 754 

Rhode Island 85.98 85.98 19,920 79.40 79.40 20,703 73;32 73.32 21,517 67.71 67.71 22,363 62.53 62.53 23,242 

South CaroLina 117.73 117.73 75,643 113.32 113.32 79,717 109.07 109.07 84,010 104.98 104.98 88,534 101.05 101.05 93,302 

South Oakota 139.28 139.28 11,962 143.28 143.28 12,979 147.40 147.40 14,083 151.63 151.63 15,281 155.98 155.98 16,581 

Tennessee 85.11 85.11 111,870 84.05 84.05 123,207 82.99 82.99 135,694 81.95 81.95 149,447 80.93 80.93 164,593 

Texas 102.72 102.72 401,196 101.41 101.41 448,519 100.13 100.13 501,424 98.85 98.85 560,569 97.59 97.59 626,691 

Utah 205.97 181.88 37,961 207.38 180.00 40,838 208.80 183.31 45,208 210.23 189.54 50,813 211.67 192.11 55,983 

Vermont 210.62 181.88 19,426 212.90 180.00 21,114 ;;: .:: 183.31 23,615 217.52 189.54 26,817 219.87 192.11 29,852 

Virginia 149.70 149.70 126,428 147.15 147.15 137,318 144.63 749,147 142.16 142.16 161,994 139.74 139.74 175,948 

Wash i ngton 222.30 181.88 157,773 237.37 180.00 169,805 253:45 183.31 Ig,;;; 270.63 189.54 211,463 288.97 192.11 233,084 

Uest Virginia 72.39 72.39 33,917 74.84 74.84 37,133 77,38 77.38 80.00 80.00 44,506 82.72 82.72 48,725 

Uisconsin 174.71 174.71 99,213 186.95 180.00 103,486 200.05 183.31 106:699 214.06 189.54 111,697 229.05 192.11 1;;,;;; 

Uyomi ng 197.13 181.88 11,621 202.09 180.00 12,708 207.17 183.31 14,301 212.38 189.54 16,340 217.73 192.11 

Guam 397.78 181.88 1,852 466.53 180.00 1,890 547.16 183.31 1,985 641.73 189.54 2,116 752.65 192.11 2:212 

Puerto Rico 26.75 26.75 11,469 27.61 27.61 10,938 28.50 28.50 10,431 29.41 29.41 9,948 30.36 30.36 9,487 

Virgin Islands 258.81 181.88 3,028 286.13 180.00 2,958 316.34 183.31 2 #974 349.74 189.54 3,035 386.66 192.11 3,037 

TOTAL %158.73 $141.46$6,386,125 $161.40 $139.92 %,838,934 $164.60 $140.28$7,420,527 $168.36 $141.89$8,116,367 $172.75 $142.21 $8,791,989 

Speciat Match s ‘ings (80,000) (90,000) (90,000; (90,000: (90,000) 

ADJ TOTAL $6,306,125 %, 748,934 $7,330,527 $8,026,367 $8,701,989 
Flexibility and Administrative Reliefi Unlike the other options, this alternative would not


reduce the administrative burden currently experienced by States and the Federal


Government. Though they would not have to allocate costs between the AFDC, Food


Stamp and Medicaid programs, States would continue to meet current reporting


requirements.


Costs Based on historical data through FY 1993, we project that a cap on


reimbursement at 150 percent of the national median would reduce the Federal share of


administrative funding by $839 million from FYs 1995-1999. Using the 125 percent cap,


the Federal share of administrative funding would be reduced by $2.9 billion from FYs


1995-1999. A cap approach only controls the growth at the margin based on those States


that exceed the cap. As States continue to report increases in administrative costs, the


national median and therefore, the Federal cap would increase correspondingly.


Disparity This option would reduce some of the funding disparity that exists between


States. States with the highest cost would see their cost per recipient levels reduced,


closing the funding gap somewhat.


Predictability This option would not improve predictability in the system. The system


would still be dependent on the cost allocation plans submitted by the States.


OPTION 5: FIAT PERCENT 

The final option reimburses each State on the basis of its ratio of administrative cost to 

total program cost (see Table 8). 

Specifically, we calculated the FY 1993 ratio of administrative cost to total program cost 

for each State. We then applied that ratio (or percentage) to an estimated benefit 

payment in subsequent years. (AFDC, Medicaid and Food Stamp benefit payments 

combined increased by 17.8 percent annually.) For example, Alabama’s ratio of 

administrative cost to total program cost is 3.6 percent in FY 1993. The estimated total 

benefit payment for Alabama is $2.5 billion in FY 1995. To calculate Alabama’s FY 

1995 Federal share of administrative costs, we applied the 3.6 percent to benefit 

payments. This resulted in an expenditure of $91.6 million in administrative costs for the 

Federal Government to Alabama. 

We adjusted for savings already realized by the AFDC and Food Stamp programs by the 

reduction in special matching rates by subtracting the estimated savings amount from 

total administrative costs. 

16

---------- ------- -------------------------------------------------------------------

----------------------------

>>> TABLE 8 <<c 

FLAT PERCENTAGE 

($ in thousands) . 

FY 1993 FY 1994 FY 1995 FY 1996 

A&/Tot Ah Adn Adm 

FY 1997 FY 1998 FY 1999 

Adm Ackn Ah 

$136,157 $165,994 $202,370 

48,678 57,988 69,078 

315,787 429,047 582,929 

76,646 89,200 103,809 

AI abama 

Alaska 

Arizona 

Arkansas 

California 

Colorado 

Connect i cut 

Dela~are 

Dist. of COL. 

Florida 

Georgia 

Hawaii 

Idaho 

Illinois 

Indiana 

I oua 

Kansas 

Kentucky 

Louisiana 

Maine 

Haryl and 

Massachusetts 

Michigan 

Minnesota 

Mississippi 

Missouri 

Montana 

Nebraska 

Nevada 

New Hampshire 

Neti Jersey 

Neu Mexico 

Neii York 

North CaroLina 

North Dakota 

Ohio 

Oklahoma 

Oregon 

Pennsylvania 

Rhode Island 

South Carolina 

South Dakota 

Tennessee 

Texas 

Utah 

Vermont 

Virginia 

Washington 

Uest Virginia 

Uisconsin 

~:i ng 

Puerto Rico


Virgin Islands


TOTAL


Sp Match Savings


AOJ TOTAL


---------------------------------------------

3.6%! $75,141 ‘-- ““” $91,608 “-- “-- $111,683 

9.3% 28,796 34,303 40,863 

6.2% 125,910 171,069 232,425 

4.1% 48,626 56,591 65,859 

1,074,635 1,254,571 1,464,635 1,709,872 I, W6,171 2,330,408 

::E 53,339 63,815 76,349 91,345 109,287 130,753 

4.4% 75,250 90,322 108,412 130,126 156,189 187,472 

8.2% 19,009 22,651 26,991 32,162 38,325 45,668 

42,080 48,169 55,139 63,117 72,249 82,703 

;:; 260,454 328,316 413,859 521,692 657,620 828,964 

5.2% 164,246 194,331 229,928 272,045 321,876 380,835 

5.7% 26,077 29,900 34,283 39,310 45,073 51,680 

7.4% 24,553 28,655 33,443 39,030 45,550 53,160 

258,188 295,440 338,067 386,844 442,659 506,527 

?:% 84,761 101,531 121,620 145,683 174,506 209.033 

4.7% 44,279 49,430 55,180 61,598 68,763 76;762 

4.6% 47,301 58,049 71,238 87,423 107,287 131,663 

4.3% 93,683 108,844 126,459 146,924 170,701 198,327 

2.2% 100,024 125,330 157,038 196,768 246,550 308,926 

3.7% 29,818 34,978 41,033 48,134 56,466 66,239 

7.6% 129,669 149,221 171,722 197,615 227,412 261,703 

4.5% 141,831 162,667 186,565 213,973 245,407 281.460 

6.4% 281,616 313,791 349,642 389,590 434,102 483; 699 

7.3% 132,215 147,817 165,260 184,761 206,563 230,938 

3.0% 48,742 55,785 63,845 73,070 83,628 95.712 

3.8% 92,344 113,250 138,889 170,332 208,894 256; 186 

5.4% 19,953 22,789 26,028 29,727 33,952 38,778 

5.6% 30,606 35,492 41,158 47,727 55,346 64,181 

6.2% 25,584 33,706 44,405 58.502 77,073 101.540 

5.5% 21 #933 30,758 43,134 60; 489 84,827 118;958 

6.3% 241,409 289,610 347,434 416,804 500,024 599,860 

4.3% 36,5~ 43,608 51,997 62,000 73,927 88,148 

5.4% 850,164 979,117 1,127,628 1,298,666 1,495,647 1,722,506 

4.3% 137,614 166,600 201,690 244,1Zf 295,603 357,865 

5.0% 13,886 15,615 17,558 19,744 22,201 24,964 

4.3% 234,633 265,290 299,953 339.144 383,456 433.559 

7.3% 98,365 112,321 128,258 146;456 167,236 190;965 

8.8% 98,359 114,771 133,920 156,264 182,337 212,760 

5.1% 297,308 346,414 403,630 470,297 547,975 638.482 

3.2% 21,751 25,654 30,258 35,687 42,091 49; 644 

4.4% 83,752 102,989 126,643 155,Z51 191,499 235,482 

4.1% 11,483 12,978 14,668 16,578 18, i37 2~8176 

3.6% 109,662 130,392 155,041 184.349 219,197 260.633 

4.5% 403,683 507,660 638,419 802; 857 1,009,650 1, 269; 707 

7.0% 41,862 48,829 56,955 66 #434 

7.8% 21,070 24,320 28,071 32,402 

7.4% 125,098 146,026 170,455 198,970 

7.3% 168,135 197,670 232,393 273,216 

2.2% 34,524 42,121 51,388 62,695 

4.8% 92,555 101,337 110,953 121,481 

7.2% 11,839 14,281 17,226 20,778 

10.3% 3,057 3,375 3,726 4,114 

9.6% 12,919 13,235 13,559 13,891 

15.1% 3,832 4,059 4,300 4,555 

5.8% .$6,754,198 $7,961,449 $9,401,275 $11,122,414 

($90,000) ($90,000) ($90,000) ($90,000) 

$6,664,198$7,871,449 $9,311,275 $11,032,414 

77,490 90 #386 

37,400 43,169 

232,256 271,110 

321,211 377,636 

76,490 93,320 

133,009 145,630 

25,063 30,232 

4,542 5,015 

14,231 14,580 

4,826 5,112 

.S13,184,803 $15,662,402 

($90,000) ($90,000) 

$13,094,803$15,572,402 
E?U’-

Adequaq States would have little incentive to reduce administrative costs under this 

option, since administrative reimbursement would be tied to benefit payments rather than 

the actual cost of administering these programs. States most at risk under this option are 

those with a relatively low ratio of administrative costs to benefit payments. States with a 

lower percent would be held to this level. This outcome is similar to the block grant 

option which freezes States at their FY 1993 funding levels, then increases in subsequent 

years for inflation only. 

Flexibility and Administrative Relief Like many of the other options, this option would 

simpli& the system for funding administrative costs for the States and the Federal 

Government. States could eliminate or modify their burdensome cost allocation system 

and increase their flexibility in the use of these funds. 

Costs This option illustrates that not all options necessarily result in cost savings. In 

fact, based on our assumptions, there would be virtually no cost control under this 

option. Based on historical data through FY 1993, we project that by FY 1999, the 

Federal share would be $16.8 billion more than it would be under the current system. By 

basing administrative funding as a percentage of benefit costs, it allows the benefit levels 

to drive the allowable level of administrative costs. This method even fails to recognize 

the fact that in recent years, as a percent of total program costs, administrative costs 

have been shrinking. 

Disparity There would continue to be disparity among the States since future 

administrative funding will be based on the current ratio of administrative costs to total 

program costs. 

Predictability Budgeting for administrative costs under this approach would continue to 

be done retrospectively since it will be based on annual program costs. 

17

CONCLUSION 

The issue of reforming the administrative cost allocation system is very relevant today 

given the considerable interest in “reinventing” Federal Government operations. If action 

is not taken, this cost allocation system will remain burdensome to both the States and 

the Federal Government. It will also be costly and difficult to audit. Therefore, we 

believe that opting to reform the system is preferable to an approach which maintains 

the status quo with enhanced monitoring capabilities. We also believe that reform should 

be implemented concurrently with enhanced efforts to insure quality in the delivery of 

services. 

This study illustrates several of many possible alternatives that seek to address the 

fundamental problems in the current cost allocation system. We recognize that as a 

result of implementing one of these options, States may not receive as much Federal 

funding as they might under the current system. However, significant benefits will accrue 

to both the States and the Federal Government by simpli&ing the administrative cost 

funding system. These benefits include: increased flexibility, reduced growth in cost, 

minimized funding disparity among States, and greater predictability for Federal 

budgeting and planning. 

These alternative funding approaches are meant to serve as examples of what can be 

done. Any of the options could be modified to moderate their impact on State budgets 

or to achieve greater savings. They could even be adapted to increase Federal financing 

of administrative costs should policy makers wish to do so. The options would then 

provide more control and flexibility in spending. 

We also believe that some combination of the options might have a number of 

advantages. For example, the block grant alternative could be combined with the 

standard cost per recipient approach. Under this combined alternative, States would 

receive their block grant amount as described under Option 2 and an additional standard 

amount (see Option 3) for the increase in the number of recipients for each year. By 

combining these two options, States would not have to absorb the increased cost of 

additional recipients since they would receive reimbursement for them. In addition, 

States would gain greater discretion over the use of their administrative funds. This 

alternative would also decrease States’ administrative burden since they could eliminate 

or modi& their cost allocation methodologies and reporting requirements for these three 

programs. Federal accountability and monitoring concerns would also be addressed. 

Finally, programs other than the three discussed in this report could be considered as 

could different combinations. For example, administrative costs for Child Support 

Enforcement programs could have been substituted for Medicaid to illustrate other 

possibilities. Our bottom line is that the system for reimbursing administrative costs 

should be simplified and made more controllable, predictable and efficient. 

18

APPENDIX A 

Administrative Costs and Recipients, 1989-1993 

A-1 
ADMINISTRATIVE COSTS


1989-1993


(constant dollars = 1993 dollars)


1989 1990 1991 1992 1993	 % 

Change 

AFDC


Current $ $:9;; $;,~ $1,405 $1,492 $1,517 11.69Z0


Constant $ ? ? 1,491 1,537 1,517 -4.2%


Medicaid


Current $ 1,654 2,005 2,155 2,365 2,682 62.2%


Constant $ 1,927 2,216 2,286 2,436 2,682 39.2%


Food Stamps


Current $ 1,172 1,247 1,349 1,465 1,540 31.4%


Constant $ 1,365 1,378 1,431 1,509 1,540 12.8%


TABLE 2 

TOTAL RECIPIENTS 

1989-1993 

(in thousands) 

1989 1990 1991 1992 1993 % 

Change 

AFDC 10,934 11,466 12,596 13,625 14,143 29.3% 

Medicaid 23,511 25,255 28,280 31,150 33,432 42.2910 

Food Stamps 18,764 19,931 22,625 25,403 26,982 43.8% 

A-2

ADMINISTRATIVE COST PER RECIPIENT 

1987-1993 

(constant dollars = 1993 dollars) 

1987 1988 1989 1990 I 1991 1992 1993 I 

AFDC $122 $143 $145 $126 $118 $113 $107 

Constant 

Dollars , 

I 

Medicaid 73 80 82 88 81 78 80 

Constant


Dollars


Food Stamps 69 73 73 69 I 63 59 57


Constant


Dollars


TABLE 4 

Correlation of Percent Change in Administrative Costs 

and Percent Change in Recipients 

1 Correlation Coefficient 

1987-1988 I .0427 

1988-1989 I .1532 

1989-1990 .2166 

1990-1991 .0656 

1991-1992 .1742 

1992-1993 .2214 

Note: The Correlation Coefficient (r) is a measure of the association between two 

variables, X and Y. A perfect correlation of + 1 indicates that all possible values of X 

and Y lie on a straight line with a positive slope. A perfect negative correlation, -1, 

indicates that all possible values of X and Y lie on a straight line with a negative slope. 

A correlation of O means the variables are uncorrelated. 

A-3

~ecalculation is based onannual data from all States and territories. The independent 

variable (X) is the percent change in the number of recipients in each State or territory 

and the dependent variable (Y) is the corresponding change in administrative cost. 

A-4

APPENDIX B 

Agency Comments and OIG Response 

B-1 
RESPONSE TO AGENCY COMMENTS 

We received comments on the draft report from the Assistant Secretary for Management 

and Budget, the Assistant Secretary for Planning and Evaluation, and the Asistant 

Secretary for Children and Families. They state that we have not necessarily 

demonstrated a serious problem in this area, expressed concerns about the way we 

estimated future costs and possible savings, and pointed out that there may be valid 

reasons for some disparities in costs among the States. The ACF also requested a fuller 

discussion of the pros and cons of the various funding alternatives. The Health Care 

Financing Administration provided informal comments on early drafts, but did not 

provide comments on the latest one. 

We recognize the legitimate concerns that have been raised and have considered them 

carefully. We have revised the report in several places, primarily to focus more 

succinctly on the need to change the current system and to update our savings 

projections based on the latest available data. 

At this point we believe that we have an honest disagreement about the nature of this 

problem and its appropriate solution. Perhaps this disagreement stems from differences 

in overall focus. 

The agency comments focus on whether total costs within the current system are out of 

control. There is some evidence offered, such as recent declines in cost per recipient 

data and a levelling off of the rate of increase in Federal costs, that there is no real 

problem here. We have reservations about the significance of these indicators and we 

address them within the report itself. More importantly though, we think that these 

indicators do not address the most important issue. 

We think that the real issue is the current cost reimbursement system itself. The system 

puts us at risk because we have difficulty knowing what we are paying for, whether it is 

cost effective, and what we will have to pay out in the future. It provides little incentive 

to economize, and is itself an inefficient system. 

Agency comments also caution that our proposals could harm some States by not taking 

into account their peculiar needs. We see similar problems of inequity with the current 

system. 

Thus, we continue to believe that the current cost reimbursement system for welfare 

administrative costs needs to be replaced for the following reasons. 

o	 Under the current system we are not sure of what we are paying for and 

whether expenditures are cost-effective. It would require a considerable 

investment in expanded auditing and monitoring to find out. These costs 

would be prohibitive especially in an environment of declining resources. 

Our Office of Audit Services has reported that the current cost allocation 

B-2

system results in mountainous paperwork, labyrinthine accounting and 

detailed auditing and negotiation processes. 

o	 We can not predict with any degree of certainty under the current system 

what the States are going to charge us in the future. This issue becomes 

very important in thinking about how much the Federal Government wants 

to pay for administrative costs under welfare reform. 

o	 There is significant cost disparity among the States, without any clear 

relation to outcomes. While there are reasons offered for some disparity, 

there is no solid evaluated data that rules out efficiency as a factor in cost 

disparity. We also could find no significant correlation between 

administrative costs and numbers of recipients on an individual State-byState basis. 

For these reasons, we believe that the current cost allocation system should be replaced 

by a system that provides adequate funding for States, incentives for efficient operations, 

decreased Federal monitoring and oversight, and predictable Federal expenditures. We 

think that the options presented in this report are a good place to start in developing a 

new welfare administrative cost system. 

We want to caution the reader that the dollar estimates for the various options are 

illustrative only. In further developing a new administrative cost system, it will be 

necessary to prepare detailed estimates based on clearly defined assumptions, using the 

most recent information available. 

The following are our responses to each of the offices that we received comments from. 

Assistant Secretary for Management and Budget 

Outvear estbnates are diiRmmt than Mid-S&n J!Miinates


There are, of course, numerous methods that could be used to estimate future


administrative expenditures. We recognize that our estimates are higher. We felt that


the best predictor of the future was actual past experience over a number of years, so we


used a 5 year average, actual cost by State, to predict future costs. We have now


updated these projections in this final report using a 5 year period of FY 1989- FY 1993,


the most recent years for which reliable State data is available.


LM%rence between adminkm tive cat m wth in the AEDC and Food Stamn vmgra m. and


in h M&aid urwra m


We realize that there have been differences among the three programs in their rates of


administrative cost growth. However, we believe that administrative cost issues could be


addressed more effectively by looking at a more global perspective rather than a narrow


perspective of individual programs. We know that at the State and local level many of


the administrative functions and personnel are overlapping among these three programs.


B-3

We believe that a prospective administrative cost system that includes all three would 

provide the greatest flexibility and the most incentives for an efficient operation. 

Rehztionshir)between m wth in admikrative costr and casekurd growth 

We could find no significant correlation between costs and workload on a State-by-State


basis in the current cost reimbursed system. There are a variety of factors that


contribute to administrative costs. It is difficult to ascribe to any one factor precisely how


much it affects the growth.


. . LMrxmtv among State-s 

While there are many reasons given for the disparity, we found no solid programmatic or


evaluative data that explained what those reasons are and whether they are good


influences on administrative costs. We also could find no solid data that would suggest


that some States should be spending more than twice what other States spend per capita


on administrative costs.


shDkdiC atkm of Cost Allocation Svstems


We agree that the long range goal should include even more programs and that the


current cost allocation system needs to be replaced. We believe that the three programs


we analyze in this report provide a good example of how funding for many programs


could be combined.


Assistant Secretary for Planning and Evaluation 

Failure to ernriurs&e the &clineir it adinbdrative costs per case for welfare 

When we began this study, we believed that a common indicator, such as cost per 

recipient would be useful in looking at the rate of growth of administrative costs over 

time. In fact we used it in early working drafts. However, as we conducted further 

analysis, we could find no significant correlation between costs and recipients on a Stateby-State basis, and thus do not believe that it is a reliable indicator of the efficient use of 

administrative funds over a given period of time. For example, we do not believe that 

the recent decrease in cost per recipient for the three programs is necessarily indicative 

of more efficient State operations. It seems to us to be much more the result of recent 

dramatic increases in caseload with States unable to increase administrative resources 

proportionately. 

In regard to the selection of the years for our analysis, we only had complete data up 

through 1992 when we prepared the official draft report. We agree that more cument 

data would be better. We now have available the 1993 data and have included it in this 

final report. We used this more recent data instead of the earlier data to update all of 

our estimates. With regard to unit costs, the report does, as did the draft, indicate that 

the time period used could affect the trend in unit costs. 

B-4

l%e retxxtk estimates of ROtential savingr are ovem~ated 

We agree that the most current data should be used in making any estimates regarding 

expenditures or savings. We also know that the savings are very sensitive to assumptions. 

For that reason, it is probably useful to look at savings using different assumptions and 

think about a range of numbers rather than an absolute amount. However, as noted in 

the previous paragraph, we did update our estimates based on more recent data. Savings 

estimates have been reduced as a result, although they remain significant for most 

options. 

State varihtibn k not bad w 

We agree that State variations;n costs is not bad per se. However before financing such 

variations it would be useful to know what we are paying for and why there is variation. 

Because of the complexities in the accounting systems used, we do not believe in the case 

of administrative costs that it is practical for us to be able to know what we are paying 

for, what constitutes the variation, and what the outcomes are of that variation. 

Assistant Secretary for Children and Families 

2?ie retxwtdim not ertabli.rh that there k a maior ~roblern with W irw of admirdktnrtive 

m 

We believe that the two biggest problems with the current system are a lack of 

accountability and a lack of cost predictability. Under the current system, we are not 

sure of what we are paying for and whether expenditures are cost-effective. We also can 

not predict with any degree of certainty how much we are going to pay in the future, 

since States decide how much they are going to charge the Federal Government. We 

also know that the current cost allocation system results in tremendous paperwork and 

requires significant administrative oversight. We believe that there are other ways to 

adequately reimburse States for administrative costs that will result in more efficient 

operations at both the State and Federal level, and will provide predictable future 

Federal costs. 

l%e rewti doer not adkauatelv exulime the reasonr for the dirmuitkr among the States for 

each of the three Dnnmuns 

We noted the disparity among the States to indicate that some States require more dollar 

inputs, per person, in their system than other States. We found a lot of anecdotal 

evidence for this difference in inputs, but could find no solid programmatic or evaluative 

data to explain the need for the difference in inputs. We also have questions about 

whether these differences in inputs are related to differences in outcomes. We believe 

that to try to accurately measure all the factors that influence costs and to relate those 

inputs to outcomes would be extremely difficult and very costly. We fully acknowledge 

that the needs of States may vaxy. We are not at all certain that the current system 

responds better than any of the options we present. 

l’he rernxt dixs not fudk add’rtxr the mos and cons of the vatious thndbw o@iOns 

This report was meant to suggest logical options to the current cost reimbursement 

system for administrative costs. These options have been discussed and debated at 

B-5 
different times over the past ten years by various administrations. However, we did add 

language is several places to remind the reader that some options might not address 

specific problems encountered by each State. We point out that this is also a problem 

with the current system. We also agree that once a general approach is decided upon, 

more detailed analysis can be performed. We had already stated this explicitly in the 

report. 

B-6

,*,...W,, 

*.* % 

:

;“ / DEPARTMENT OF HEALTH & HUMAN SERVICES 

‘++QW 

.

8

% 4 ADMINISTRATION FOR CHILDREN AND FAMI 

Office of the Assistant secretary, Suite 600 

370 L’Enfant Promenade, S,W. 

Washington, D.C, 20447 

DATE : Deamber 16, 1994 

TO:	 June Gibbs Brown 

Inspector General 

FROM: Mary Jo Bane 

Assistant Secretary~TQ_4_ 

for Children and Families 

SUBJECT: Comments - OIG Draft Report: IIwelfare Administrative 

costs,” OEI-05-91-01080


As requested, we have reviewed the subject Draft Report and find


it unchanged from the previous draft submitted to us for comments


in March 1993. While minor modifications have been made to the 

current draft, a few of the comments we provided to the OIG 

earlier this year have been incorporated. The substance of the 

material in the “Background” and the five ‘Alternate Funding


Optionsm sections is the same as the 1993 Draft.


We have serious concerns about the present Draft. We believe


previously provided comments, along with those of HCFA and FNS,


should be incorporated. AS the report now stands, a distort@d


picture of administrative costs is given when the three programs


are combined. There are considerable differences in the policies 

and procedures of the respective programs which are not taken 

into account. 

Furthermore, we believe that the report should make clear that


the present administration of these programs is not out of


control. We appreciate the concerns about the administrative


costs of thesa three programs, but the report does not provide


sufficient analysis to accurately portray the complexities of the


issues, and it does not sufficiently discuss the advantages and


disadvantages of the options available. Each of the listed


options could cause serious problems, and could adversely affect


specific States in different ways. We believe the discussion of


options should be expanded to fully discuss the consequences and


potential problems associated with each option. As it stands,


the options might be perceived as simple solutions to a very


complex issue.


In sunmary, the report does not:


(1) Establish that there is a major problem with funding of


administrative costs.


B-7

Page 2 - June Gibbs Brown 

(2) Adequately explore the reasons for the disparities among


the States for each of the three programs.


(3) Fully address the pros and cons of the various funding


op~ions.


We continue to believe that the administrative cost for tie three


programs needs to be examined in greater detail before any


conclusions or alternative options are developed.


B-8

..,. ”, <(, 

‘&+“ .-f.

.

.*.

., DEPARTMENT OF HEALTH & I-IU,%IANSERVICES office of the Secre\a~ 

“.. \ 

Washington, D.C. 20201 

DEC 20 /994 

TO:	 June Gibbs Brown


Inspector General


FROM :	 Assistant Secretary for


Planning and Evaluation


SUBJECT :	 OIG Draft Report: “Welfare Administrative Cost%J”


OEI-O5-91-O1O8O


This responds to your request for comments on the dratc OIG


report entitled, “Welfare Administrative Costs.” We are glad the


Office of the Inspector General addressed many of the concerns


raised regarding an earlier draft of this report. This is a


significantly improved report. However, several conceptual


problems remain.


� Failure to em~hasize the declines in administrative costs 

p~ According to data in the report, the


rate of increase in administrative costs for both AFDC and


food stamps is lower than the rate of increase in the number


of clients in those two programs. Only for Medicaid do


administrative costs increase faster than the increase in


clients, suggesting that much of the problem is the rapid


pace of health care inflation.


While the draft report analyzes State administrative 

expenditure data from 1987 to 1992, more recent data for 

1993 and 1994 show a lower rate of increase. In fact, per 

client administrative costs have actually been declining


recently, even in Medicaid. In addition, the report should


discuss the reasons for its choice of starting and ending


years, 1987 to 1992.


�	 The reDort’s estimates of Dotential savinas are overstated. 

The repqrt’s projections for administrative costs for AFDC, 

food stamps, and Medicaid are between $3.5 and $5.6 billion


.-z than the Administration’sMid-Session Review


estimates for 1995-1999. Since the report’s baseline


projections are too high, the estimates of potential savings


are also too high.


�	 � not bad er se. The report sees 

disparities in p;r capita administrative costs and in rates 

of increase or decrease among States as inherently bad and 

in need of correction. But the report does not explain why


disparity is bad and it should at least discuss the reasons


why reducing disparity would lead to desirable outcomes.


B-9

Page 2 - June Gibbs Brown 

Disparities among States are to be expected, however, and


many things could explain such variation. For example,


Texas is cited as a State with low administrative costs per


client, yet it is atypical. Texas has much lower Medicaid


administrative costs than other States because it pays an


insurance provider a per capita amount to finance most 

Medicaid services. Since the insurance provider handles all 

the administrative details, the State has minimal Medicaid 

administrative costs. 

David T. Ellwood


B-10

Re 

���� ![(, 

: 

� 

..- ‘ ,. 

~“ DEPART.MEINT OF HEALTH & HULMAN SERVICES Of f(ce or @W* Cretarj 

: 

-. 

%,* Jg4*,. ,. Washtngt6@w,43? 20.20~ 3

NOv2 I 1994 

MEMowUM TO THE INSPECTOR GENERAL 

From : Kenneth S. Apf el 

Management 

Subject: OIG Draft Report: “Welfare Administrative Costs,” 

OEI-O5-91-O1O8O 

Assistant Secretary for 

Jw’/

and Budget 

This responds to your request for comments on the draft OIG


report entitled, “Welfare Administrative Costs.’t We applaud the


Office of the Inspector General for its efforts to identify a


range of options for policymakers to consider in thinking about


administrative costs and offer the following comments.


� ~
O t ear est” -Session Estimates.


The OIG~s projected administrative costs for the AFDC, Food


Stamps and Medicaid programs, for FY 1995-FY 1999, are


higher than current estimates contained in the


Administration~s Mid-Session Review for 1995-1999.


We recognize that there are many reasons for variance in 

long range estimates. Key among these is the time period 

used for the ‘~basis”of the estimate. Beginning in 1989, 

and continuing through 1991, all three of these programs 

experienced explosive caseload growth, accompanied by 

substantial increases in benefits and administrative costs. 

However, in the last several years (1993”and 1994) caseload 

and costs have grown at substantially lower levels, and 

these lower growth rates are reflected in the 

Administrationts Mid-Session estimates. 

My staff will provide you with these estimates. I would 

note that there are many valid reasons for varying 

projections, especially in programs experiencing such 

fundamental changes. 

. * �� Difference between admznistrative cost arowth n AFDC and

Food Sta~. and n e dicai~. In recent years, AFDC and 

Food Stamps administrative costs have been relatively 

stable, with moderate growth of less than ten percent 

annually. Expenditures have been relatively close to 

Administration estimates. on the other hand, Medicaid 

administrative costs have been more volatile and less


accurately projected. In considering future options, this


variance in administrative cost growth needs to recognize


that approaches and solutions may be different for each of


these programs.


�� ~d at”o s etw e 

caseload aroWth . A variety of factors contribute to 

administrative costs, one of which is caseload. Other 

B-n 
factors which influence administrative cost growth include 

policy changes such as waiver demonstrations and/or welfare 

reform, State FTE constraints, automated systems development 

costs, political and timing issues, economic issues and 

family composition. 

�� DisDaritv amona Stateq. The report recognizes that there 

are disparities across States in administrative 

costs/recipient. In many cases this disparity is the result 

of variation in services provided by States, the 

comprehensiveness of their programs, and the e%tent to which 

they have sought to make clients more self sufficient by 

lowering caseload ratios. 

� An anticipated


outcome of implementing the proposed opti&s is that cost


allocation systems and Federal monitoring could be


simplified. To achieve such simplification may also


necessitate inclusion of a broader spectrum of programs,


including Foster Care, Child Support or related programs


under the new funding mechanism.


My staff has several other editorial recommendations that will be


provided separately to your staff.


B-12


—— .— 
APPENDIX C


Endnotes 

1. OMB “Circular A-87, “cost Principles for State and Local 

Governments. ~$Attachment A, p. 6. 

2. Congressional Budget Office, “Reducing the Deficit.” February


1992, p. 232.


3. Department of Health and Human Services, Office of the Inspector


General, Office of Audit Services. Draft report # A-12-92-00014,


Reforminu the Svstem for Determination of State and Local


Government AdministrativelIndirect Costs. May 21, 1991, pi.


4. Ibid, pp. iii.


5. Ibid, p. 25.


6. Ibid, p. i.


7. Savings estimates from the reduction of special match rates in


the AFDC program come from the Agency for Children and Families.


They estimate $40 million in savings in FY 95 and $50 million in


each succeeding year. The Food and Nutrition Service in the


Department of Agriculture estimated savings at $40 million in FY 95


and each succeeding year. For ease of calculation, we use a figure


of $90 million in savings for each year from FY 95-FY 99.


8. The Census Bureau percentages used are published in: ‘tOverview


of Entitlement Programs, “ FY 1992 Green Book. Committee on Ways and


Means, U.S. House of Representatives. p.1384.


c-1