OFFICE OF 

INSPECTOR GENERAL 

CMS Oversight of 

Cost-Avoidance Waivers 

February 2004 

OEI-03-00-00031 
OFFICE OF INSPECTOR 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 Services (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 the following 

operating components: 

Office of Audit Services 

The OIG's Office of Audit Services (OAS) provides all auditing services 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 Evaluation and Inspections 

The OIG's 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 the inspections reports generate rapid, accurate, 

and up-to-date information on the efficiency, vulnerability, and effectiveness of departmental programs. 

Office of Investigations 

The OIG's Office of Investigations (OI) 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 OI lead to criminal convictions, administrative sanctions, or civil 

monetary penalties. The OI also oversees State Medicaid fraud control units which investigate and 

prosecute fraud and patient abuse in the Medicaid program. 

Office of Counsel to the Inspector General 

The Office of Counsel to the Inspector General (OCIG) provides general legal services to OIG, rendering 

advice and opinions on HHS programs and operations and providing all legal support in OIG’s internal 

operations. The OCIG imposes program exclusions and civil monetary penalties on health care providers 

and litigates those actions within the Department. The OCIG also represents OIG in the global settlement 

of cases arising under the Civil False Claims Act, develops and monitors corporate integrity agreements, 

develops model compliance plans, renders advisory opinions on OIG sanctions to the health care 

community, and issues fraud alerts and other industry guidance. 
EXECUTIVE SUMMARY 

OBJECTIVE 

This inspection reviewed the Centers for Medicare & Medicaid Services’s (CMS’s) oversight 

of the cost-avoidance waiver process. 

BACKGROUND 

Millions of Medicaid beneficiaries have additional health insurance through third-party sources 

such as Medicare or private health insurance. Because Medicaid is the payer of last resort, 

these third parties are liable for many claims submitted to Medicaid. When they receive claims 

that have a liable third-party payer, State Medicaid agencies can: (1) cost avoid, i.e., return the 

claim to the provider so that the provider can bill the liable third party, or (2) pay and chase, i.e., 

pay the provider’s claim and then seek recovery from the liable third party. States report costavoidance and pay-and-chase data to CMS as part of their CMS-64 report. 

States are required to use cost avoidance for most services unless the State has a waiver 

allowing it to pay and chase. According to 42 CFR § 433.138, CMS regional offices may grant 

these waivers when States demonstrate that pay and chase is as cost-effective as cost 

avoidance. The State Medicaid Manual requires States to renew their cost-avoidance waivers 

every 3 years. The manual does not have any requirements addressing the retention of waiver 

documentation by the CMS regional offices. 

We reviewed the waiver process at all 10 CMS regional offices. We requested information from 

the regional staff about their offices’ policies and procedures regarding the waiver review 

process, the steps they take when reviewing waiver requests, and the criteria they use to 

examine cost-effectiveness. We collected information and documentation from the regional 

offices about waivers currently held by States as well as waiver requests that had been denied. 

In addition, we surveyed Medicaid agencies in 50 States and the District of Columbia on their 

third-party liability processes and policies. We requested financial data, cost-avoidance waiver 

information, and a description of any problems States encounter when attempting to recover 

money from third parties. Forty-eight States responded to our survey. 

CMS Oversight of Waivers i OEI-03-00-00031 
FINDINGS 

CMS and States disagreed about whether certain States were operating under 

approved waivers 

Fourteen States and their respective CMS regional offices provided contradictory responses as 

to whether these States had been approved for cost-avoidance waivers. Four States reported 

that they had cost-avoidance waivers for certain services, but their regional offices indicated that 

they did not. In addition, 10 States reported that they did not have waivers for specific service 

types, yet the CMS regional office reported they did. Some of the inconsistencies over costavoidance waivers may stem from the lack of documentation maintained by certain States and 

CMS regional offices. 

CMS approved cost-avoidance waiver requests that did not address the criteria for 

proving cost-effectiveness 

Federal regulations require that for a waiver request to be approved, States must show that the 

pay-and-chase method is as cost-effective as the cost-avoidance method. The State Medicaid 

Manual provides several examples of factors that may be used to determine cost-effectiveness, 

including average-cost-per- claim, denial rates of claims, administrative costs, and 

equipment/computer costs. However, our review of 51 recent waiver requests (submitted by 18 

States from 7 regions) found that 6 of the 7 CMS regional offices approved waivers that did not 

address this criteria. In all, CMS approved 46 of the 51 waiver requests that we reviewed. For 

20 of these requests, States did not compare the cost-effectiveness of pay and chase to that of 

cost avoidance. CMS denied 5 of the 51 waiver requests, and 1 of the denials was due to a 

failure to prove cost-effectiveness. In addition, unlike other regional offices, one CMS regional 

office is not requiring States to renew cost-avoidance waivers every 3 years as required by the 

State Medicaid Manual. Therefore, the data used to justify cost-avoidance waivers in this 

region could potentially be years out-of-date. 

CMS does not require States to report the data necessary to determine the costeffectiveness of cost-avoidance waivers 

While CMS requires the reporting of actual recovery amounts on the CMS-64, it does not 

require States to track the amounts they attempted to recover or the amounts validly denied by 

third parties. Keeping an accurate account of this information is necessary in order to evaluate 

the cost-effectiveness of both pay-and-chase and cost-avoidance efforts. We asked States to 

identify the amount they attempted to recover, the amount actually recovered, and the amount 

validly denied by third parties in 2000. Of the 34 States that had cost-avoidance waivers 

(according to CMS), 17 did not report attempted recoveries or validly denied figures to us. 

Without this data, we believe it would be difficult for CMS to make informed decisions 

concerning the cost-effectiveness of waivers. 

Another 17 States, however, did provide the requested data to us. Figures reported by 14 of 

the 17 States that provided data showed $307 million in outstanding payments 

CMS Oversight of Waivers ii OEI-03-00-00031 
potentially owed by liable third parties in Federal fiscal year 2000. This money has been paid 

out by the Medicaid program, yet the dollars associated with these claims have not been 

returned to the Federal government and the States. 

RECOMMENDATIONS 

Our findings show that CMS is not exercising effective oversight of the cost-avoidance waiver 

process. Because of the significant program dollars potentially at risk, we believe that proper 

oversight is critical. 

We understand that waivers provide Medicaid agencies with the flexibility to design effective 

programs for their individual States. We also recognize that CMS has taken steps to review 

their guidance of the waiver process. However, based on our findings, we believe that CMS 

needs to provide more effective oversight of the cost-avoidance waiver process. 

We recommend that: 

CMS improve its oversight of the cost-avoidance waiver process by: 

• Approving only waivers that meet the criteria for cost-effectiveness set forth by Federal 

regulation 

• Ensuring that States abide by the State Medicaid Manual’s requirement that waivers be 

renewed every 3 years 

• Requiring regional offices to retain proper documentation for all waivers 

CMS require States to track the amount of money they attempt to recover from 

third parties and the amount that is validly denied to assist in evaluating the costeffectiveness of both pay-and-chase and cost-avoidance efforts 

Agency Comments 

CMS concurs with our recommendation that they should improve its oversight of the costavoidance waiver process. CMS also concurs with our recommendation that States should 

track the amount they attempt to recover from third parties and the amount that is validly denied. 

However, CMS added that requiring States to track these amounts would produce little 

additional information of value, while at the same time taking away needed resources regarding 

the implementation of Health Insurance Portability and Accounting Act (HIPAA) requirements. 

With the implementation of HIPAA electronic billing standards, CMS believes providers will be 

able to bill liable third parties more easily, thereby reducing Medicaid third-party recovery 

activities. CMS says that they will reassess the need to track the amount States attempt to 

recover from third parties and the amount that is validly denied within a few years of HIPAA 

implementation. 

CMS Oversight of Waivers iii OEI-03-00-00031 
In addition, CMS believes that our potential outstanding debt calculation may be significantly less 

than what is stated in our report. CMS noted that it is difficult to actually quantify the dollars at 

risk since there are many factors that affect this calculation. For instance, States “cast a wide net 

when seeking recoveries” because they do not always know if individuals have third-party 

insurance coverage nor do they know the extent of coverage. As a result, some third parties are 

not liable for the claims or liable for only a portion of the claim. In addition, States often do not 

receive responses from third parties regarding pursued claims. 

OIG Response 

In terms of our potential outstanding debt calculation, we simply based our calculation on figures 

reported to us by States. We recognize the fact that States may be pursuing dollars that in the 

end are not owed by third parties. For this reason, we use the phrase “as much as” when 

referring to the potential outstanding debt estimate. Both the States and CMS would have a 

more accurate picture of the amount owed to the States if CMS were to implement our 

recommendation that States track the amount they attempt to recover from third parties and the 

amount that is validly denied. These data would assist CMS in determining the costeffectiveness of cost-avoidance waivers. Furthermore, we believe that non-responses from third 

parties should not be a factor when calculating how much money is owed to the State. The 

State’s entitlement to recovery does not change if a liable third party has not responded to the 

State’s request for recovery. 

CMS Oversight of Waivers iv OEI-03-00-00031 
TABLE OF CONTENTS 

PAGE

EXECUTIVE SUMMARY ....................................................... i

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

FINDINGS

CMS and States disagreed about whether a State had a waiver .......................... 5

CMS approved waivers that did not address criteria .................................. 7

CMS does not require States to report necessary data ................................ 8

RECOMMENDATIONS ....................................................... 9

APPENDICES

A. States with Cost-Avoidance Waivers as of December 2001 ........................ 11

B. Centers for Medicare & Medicaid Services’s Comments ........................... 13

ACKNOWLEDGMENTS ..................................................... 16

CMS Oversight of Waivers v OEI-03-00-00031 
INTRODUCTION 

OBJECTIVE 

This inspection reviewed the Centers for Medicare & Medicaid Services’s (CMS’s) oversight 

of the cost-avoidance waiver process. 

BACKGROUND 

The Medicaid Program 

Medicaid is a jointly-funded Federal-State health insurance program for certain low income and 

medically needy individuals and families. Individual States establish eligibility requirements, 

benefits packages, and payment rates for Medicaid under broad Federal standards set by CMS. 

In 2001, the Medicaid program served 42 million beneficiaries at a cost of $217 billion. 

Beneficiaries with Third-Party Insurance 

Millions of Medicaid beneficiaries have additional health insurance through third-party sources 

such as Medicare, State worker’s compensation, or private health insurance. When a 

beneficiary has coverage under a third party, the Medicaid program is required by law to be the 

payer of last resort. Federal regulations (42 CFR § 433.145) state that if Medicaid paid for a 

service that is covered by a third party, Medicaid has a right to recover the payment from the 

third party. 

According to 42 CFR § 433.138, State Medicaid agencies must take reasonable measures to 

determine the liability of third-party payers in order to avoid paying claims inappropriately. 

Reasonable measures include: (1) collecting insurance information from prospective Medicaid 

beneficiaries; (2) conducting data exchanges with Social Security Administration wage and 

earnings files; and (3) conducting data exchanges with State files that contain information on 

wages, welfare enrollment, motor vehicle accidents, and workers’ compensation. Any of these 

sources may indicate the existence of other health insurances. 

Processing Claims with a Liable Third-Party Payer 

When State Medicaid agencies receive claims that may have a liable third-party payer, States 

can either: (1) cost avoid, i.e., return the claim to the provider so that the provider can bill the 

liable third party, or (2) pay and chase, i.e., pay the provider’s claim and then seek recovery 

from the liable third party. According to CMS data, Medicaid avoided paying almost $21 billion 

in claims in Federal fiscal year 2000, and collected another $683 million from liable third parties 

after originally paying the claims. 

CMS Oversight of Waivers 1 OEI-03-00-00031 
States are required to use the cost-avoidance method unless the claim received is for preventive 

pediatric services, prenatal care, or services provided through a parent’s court-ordered child 

support obligation. However, States may apply to CMS for a waiver if they wish to pay and 

chase other types of claims. According to 42 CFR § 433.139(c), Medicaid agencies may 

sometimes pay and chase claims without a waiver if they cannot determine the existence of thirdparty coverage at the time the claim was received. 

Granting of Cost-Avoidance Waivers by CMS 

States request cost-avoidance waivers from the CMS regional office serving their geographic 

area. According to 42 CFR § 433.138, a CMS regional office may approve a State’s waiver 

request if the State demonstrates that the pay-and-chase method is as cost-effective as the costavoidance method. The State Medicaid Manual provides several examples of factors that may 

be used to determine cost-effectiveness, including average-cost-per- claim, denial rates of 

claims, administrative costs, and equipment/computer costs. Usually, a separate waiver request 

is submitted for each specific service type (e.g., pharmacy services). According to the State 

Medicaid Manual, States are required to renew their cost-avoidance waivers every 3 years. 

The manual does not have any requirements addressing the retention of waiver documentation 

by the CMS regional offices. 

Reporting of Third-Party Liability Data 

States report third-party liability data to CMS as part of their Quarterly Medicaid Statement of 

Expenditures for the Medical Assistance Program (Form CMS-64). The CMS-64 report for 

each State is recorded in CMS’s Medicaid Budget and Expenditure System. States are 

required to provide both the total amount that was cost avoided and the total amount collected 

through pay and chase on their CMS-64 report. These amounts are reported as overall totals 

and are not subdivided by service type. States are not required to report the amount of money 

they attempted to recover or the amount that was validly denied by third parties on the CMS64. “Validly denied” refers to claims where the third party was found not to be liable for the 

amounts that the State attempted to recover. According to CMS, the data from the CMS-64 

report is used to monitor and evaluate the effectiveness of States’ third-party liability activity. 

Previous OIG Work 

A previous study conducted by the Office of Inspector General (OIG), Medicaid Recovery of 

Pharmacy Payments from Liable Third Parties (OEI-03-00-00030, August 2001), found 

that Medicaid was at risk of losing over 80 percent of the dollars it paid and chased for 

pharmacy claims. We recommended that CMS: (1) review States cost-avoidance waivers for 

pharmacy claims; (2) require States to track the amount they pay and chase for pharmacy 

claims; and (3) determine whether legislation is needed to assist States in recovering payments 

from liable third parties. CMS concurred with all but one of our recommendations. Specifically, 

in response to our recommendation on tracking pay-and-chase amounts, CMS concurred in 

theory, but wrote that, in the interest of State flexibility, it was reluctant to require States to 

collect this data. 

CMS Oversight of Waivers 2 OEI-03-00-00031 
Recent CMS Efforts to Review Waivers 

CMS has recently made a concerted effort to track States’ pay-and-chase activities. 

Specifically, on February 7, 2002, CMS central office sent a memorandum to all the regional 

offices on the subject of cost-avoidance waivers. The memorandum asked the regional offices 

to contact each State in their respective regions in order to identify: (1) any waivers that have 

been granted; (2) any pending waiver requests; and (3) situations where a State is using pay and 

chase without an approved waiver. According to the memorandum, once CMS central office 

obtains all the information requested from the regions, CMS will issue a follow-up memorandum 

that provides guidance on the waiver process. CMS has also conducted conference calls with 

third-party liability coordinators in some regions in an effort to develop potential guidelines and 

criteria for the review of waiver requests. 

METHODOLOGY 

State Medicaid Agency Data 

We sent a written request to the Medicaid directors at 51 State Medicaid agencies, including the 

District of Columbia, in November 2001. We asked the directors to distribute the survey to the 

staff best able to answer our questions. Representatives from 48 States responded to our 

request. The three States that did not respond were Michigan, New Jersey, and Rhode Island. 

In this report, we use the word “State” as a synonym for “State Medicaid agency.” 

We asked States to identify the cost-avoidance waivers they had been granted by CMS, to list 

any waivers that had been denied in the past 5 years, and to assess the cost-avoidance waiver 

review process. We requested that States provide documentation verifying the cost-avoidance 

waiver information reported to us. This documentation included waiver requests from States, 

approval and denial letters from CMS regional offices, and any additional correspondence 

between the States and CMS regional offices regarding cost-avoidance waivers. In addition, 

we requested that States identify any problems they encounter when trying to recover money 

from liable third parties. 

We also asked States to verify the accuracy of third-party liability data reported in the Medicaid 

Budget and Expenditure System. In November 2001, we accessed this system in order to 

obtain the amount each State cost-avoided and the amount each State recovered from third 

parties in Federal fiscal year 2000. If a State said that the amount originally reported in the 

Medicaid Budget and Expenditure System was not accurate, we asked them to provide a 

revised figure. We also asked States to report the amount they attempted to recover, the 

amount validly denied by third parties, and the amount unrecovered for Federal fiscal year 2000. 

For any State with waivers that reported each of these figures, we calculated the amount of 

money that was outstanding by adding the amount recovered to the amount validly 

CMS Oversight of Waivers 3 OEI-03-00-00031 
denied, and then subtracting the total from the amount the State attempted to recover. For 

States that indicated the recovery amount originally reported on the CMS-64 was incorrect, we 

used revised figures for this calculation. 

CMS Regional Office Data 

We reviewed the waiver process with staff from all 10 CMS regional offices. We requested 

information from regional staff about their offices’ policies and procedures regarding the waiver 

review process, the steps they take when reviewing waiver requests, and the criteria they use 

when determining cost-effectiveness. We also asked staff from CMS regional offices to assess 

the waiver review process. We collected information about the waivers currently held by States 

in each region, and about any cost-avoidance waiver requests that had been denied. A chart 

listing cost-avoidance waivers for each State is presented in Appendix A. 

Staff from OIG visited all but one CMS regional office to collect documentation verifying the 

cost-avoidance waiver information. This documentation consisted of waiver requests from 

States, approval and denial letters from CMS regional offices, and any additional 

correspondence between the States and CMS regional offices regarding cost-avoidance 

waivers. One CMS regional office mailed us documentation because we were unable to visit the 

office. Some regional offices were unable to provide documentation supporting the existence of 

all cost-avoidance waivers held by States in their region. We reviewed all recent State waiver 

requests (51) that were provided to us in order to determine if they met the criteria for approval 

described by Federal regulation. Neither the regulation nor the State Medicaid Manual 

provides specific instructions as to how States must meet the criteria, only that they must show 

that the pay-and-chase method is as cost-effective as the cost-avoidance method. Therefore, 

we considered any request that compared the cost of performing pay and chase to the cost of 

performing cost avoidance to have met the criteria. 

This study was conducted in accordance with the Quality Standards for Inspections issued by 

the President’s Council on Integrity and Efficiency. 

CMS Oversight of Waivers 4 OEI-03-00-00031 
FINDINGS 

CMS and States disagreed about whether certain States were 

operating under approved waivers 

The regional offices identified 73 waivers currently held by 34 States. For 21 of the 34 States, 

the only waiver in place was for pharmacy services. Appendix A lists the waivers that were 

approved according to CMS regional offices. 

Four States reported having cost-avoidance waivers when their respective CMS 

regional offices indicated they did not 

Four States reported that they had cost-avoidance waivers for certain services, but their CMS 

regional offices indicated that these States did not. One of these States reported having a waiver 

for dental claims while its regional office indicated it did not. Another reported having a waiver 

for pharmacy claims and long-term care/home and community- based services for the disabled 

and elderly, while the regional office said it did not. Neither State provided any documentation 

supporting their position. However, documentation from the regional offices showed that the 

waivers claimed by these States had expired. For the other two States, one said it had a costavoidance waiver for mental health evaluations, and the second reported it had waivers for their 

“birth-to-three” program and their school disability program. In both instances, the respective 

regional offices said that they were not aware of these waivers. Neither the State nor the CMS 

regional offices were able to provide documentation supporting their positions. 

Ten States reported not having waivers cited by their regional offices 

Ten States reported that they did not have waivers for the service types reported by their CMS 

regional office. For example, CMS said one State was operating under an approved waiver for 

pharmacy claims, but the State said that it did not have a pharmacy waiver. The 10 States were 

represented by 6 different regional offices. Out of the six regional offices, only one regional 

office was able to provide any documentation supporting the presence of cost-avoidance 

waivers. Table 1 below shows the cases where CMS regional offices and States differed as to 

the number of waivers held by the States. 

CMS Oversight of Waivers 5 OEI-03-00-00031 
Table 1: Discrepancies in the Number of Waivers Reported by States and CMS 

State 

Number of Waivers 

Reported by State 

Number of Waivers 

Reported by CMS Regional Office 

AK 7 6 

GA 0 1 

ID 0 2 

IL 0 1 

KS 0 4 

MN 0 1 

MO 7 6 

OH 0 1 

OR 1 6 

TN 0 1 

TX 1 2 

WI 3 1 

WV 0 1 

WY 4 2 

Source: OIG Survey of State Medicaid Agencies and OIG Interviews with CMS Regional Offices 

Inconsistencies concerning the presence of cost-avoidance waivers may stem 

from insufficient documentation 

Some of the inconsistencies concerning cost-avoidance waivers may stem from the lack of 

documentation maintained by certain States and CMS regional offices. Eight regional offices 

reported that at least one State in their region had a waiver. However, only three of the eight 

regions had a comprehensive set of documentation that supported the existence of the waivers. 

These three offices were able to provide both the waiver requests and the regional response for 

the 36 different waivers currently in place in their regions. The other 5 regions reported that they 

had approved a total of 37 cost-avoidance waivers. For two-thirds (25) of the 37 waivers, 

these 5 regional offices were unable to provide documentation supporting their existence. For 

only 4 of the 37 waivers were the regional offices able to provide documentation showing that 

the waiver had actually been approved. For five waivers, the only documentation on file was the 

waiver request letter from the State. In another three instances, the regional office had 

documentation faxed in from the State prior to our interview. 

CMS Oversight of Waivers 6 OEI-03-00-00031 
CMS approved cost-avoidance waiver requests that did not 

address the criteria for proving cost-effectiveness 

Federal regulations (42 CFR § 433.138) require that for a waiver request to be approved by 

CMS, a State must show that the pay-and-chase method is as cost-effective as the costavoidance method. The State Medicaid Manual provides several examples of factors that may 

be used to determine cost-effectiveness, including average-cost-per-claim, denial rates of claims, 

administrative costs, and equipment/computer costs. We requested that CMS regional offices 

provide the documentation for any current waivers. As previously mentioned, some CMS 

regional offices were unable to provide any documentation for a number of the waivers. We 

reviewed all of the recent waiver requests provided to us. There were 51 waiver requests 

submitted by 18 States from 7 different regions. If a State provided any comparison of the costs 

of performing pay and chase to the costs of performing cost avoidance, we considered that 

request to have addressed the approval criteria. However, our review found that six of the 

seven CMS regional offices approved waivers that did not address this criteria. 

CMS approved 46 of the 51 cost-avoidance waiver requests that we reviewed. For 20 of these 

requests, States did not, as required, compare the cost-effectiveness of pay and chase to that of 

cost avoidance. In some of these cases, States provided data, such as the costs associated with 

performing pay and chase or the amount recovered through pay-and-chase efforts, but did not 

show how this data compared with any costs associated with performing cost avoidance. In 

other cases, States did not provide any financial data at all on pay and chase or cost avoidance, 

yet their waiver requests were still approved by CMS. Requests sometimes focused on 

provider issues (e.g., cost avoidance would drive providers out of business) and beneficiary 

issues (e.g., cost avoidance may reduce beneficiary access to care) instead of cost-effectiveness. 

Of the five waiver requests that were denied by CMS, only one was due to a failure to prove 

cost-effectiveness. Three of the requests were denied because the services were not generally 

covered by third parties; a fourth request was denied because beneficiaries eligible for the 

services had typically exhausted any third-party coverage. In these cases, CMS stated that 

waivers would create an unnecessary administrative burden for both the State and CMS. 

In addition, unlike other regional offices, one CMS regional office is not requiring States to 

renew cost-avoidance waivers every 3 years as required by the State Medicaid Manual. The 

eight States in this region are not required to submit updated data supporting the costeffectiveness of a waiver. Therefore, the data used to justify cost-avoidance waivers for States 

in this region could potentially be years out-of-date. 

CMS Oversight of Waivers 7 OEI-03-00-00031 
CMS does not require States to report the data necessary to 

determine the cost-effectiveness of cost-avoidance waivers 

While CMS requires the reporting of actual recovery amounts on the CMS-64, it does not 

require States to track the amounts they attempted to recover or the amounts validly denied by 

third parties. “Validly denied” refers to claims where the third party was found not to be liable 

for the amounts that the State attempted to recover. Keeping an accurate account of this type of 

financial information is necessary in order to evaluate the cost-effectiveness of both pay-andchase and cost-avoidance efforts. This is especially true for States with cost-avoidance waivers, 

where tracking the recovery rate of outstanding payments from third parties is of primary 

importance in determining the cost-effectiveness of the waivers. 

As part of our survey, we asked States to identify the amount they attempted to recover, the 

amount actually recovered, and the amount validly denied by third parties in 2000. Of the 34 

States that had cost-avoidance waivers (according to CMS), 17 did not report attempted 

recoveries or validly denied figures to us. Several of these States indicated that they were 

unable to determine these amounts, while other States simply provided no response. Without 

this data, we believe it would be difficult for CMS to make informed decisions concerning the 

cost-effectiveness of waivers. 

Another 17 States with cost-avoidance waivers did report attempted recovery, actual recovery, 

and validly denied amounts to us. Figures reported by three of the 17 States indicated no 

outstanding debts owed by liable third parties. However, 14 of the 17 States had $307 million 

in outstanding payments potentially owed by liable third parties in Federal fiscal year 2000. 

These 14 States identified $1.33 billion in potential recoveries from liable third parties. 

According to these States, $262 million of the $1.33 billion was actually recovered, and another 

$761 million was validly denied by third parties. The remaining $307 million is considered to be 

a potential outstanding debt because the money was neither recovered by the State nor validly 

denied by the third party.1 This money has been paid out by the Medicaid program, yet the 

dollars associated with these claims have not been returned to the Federal government and the 

States. 

1

It is important to note that all of the outstanding debt may not be attributable to services covered by a 

cost-avoidance waiver. Because States are statutorily required to pay and chase for certain types of services (e.g., 

preventive pediatric care), it is possible that portions of the outstanding debt stem from these services. 

CMS Oversight of Waivers 8 OEI-03-00-00031 
RECOMMENDATIONS 

Our findings show that CMS is not exercising effective oversight of the cost-avoidance waiver 

process. Because of the significant program dollars potentially at risk, we believe that proper 

oversight is critical. 

CMS and the States were not in agreement as to whether certain States were operating under 

approved waivers. The inconsistent responses may stem from the lack of documentation 

maintained by certain States and CMS regional offices. If regional offices are unsure of which 

States in their area even have cost-avoidance waivers, proper oversight would be difficult. In 

addition, many waivers were granted by CMS despite the fact that cost-effectiveness was not 

sufficiently addressed. According to Federal regulation, cost-effectiveness is the sole criteria for 

a regional office to use when evaluating a waiver request. 

Furthermore, while CMS requires the reporting of actual recovery amounts on the CMS-64, it 

does not require States to track the amounts they attempted to recover or the amounts validly 

denied by third parties. We believe that keeping an accurate account of this information is 

necessary in order to evaluate the cost-effectiveness of both pay-and-chase and cost-avoidance 

efforts. This is especially true for States with cost-avoidance waivers, where tracking the 

recovery rate of outstanding payments from third parties is of primary importance in determining 

the cost-effectiveness of the waivers. The fact that 14 States with waivers are potentially owed 

as much as $307 million by liable third parties leads us to question whether their waivers are 

truly cost-effective. 

We understand that waivers provide Medicaid agencies with the flexibility to design effective 

programs for their individual States. We also recognize that CMS has taken steps to review 

their guidance of the waiver process. However, based on our findings, we believe that CMS 

needs to provide more effective oversight of the cost-avoidance waiver process. 

We recommend that: 

CMS improve its oversight of the cost-avoidance waiver process by: 

• Approving only waivers that meet the criteria for cost-effectiveness set forth by Federal 

regulation 

• Ensuring that States abide by the State Medicaid Manual’s requirement that waivers be 

renewed every 3 years 

• Requiring regional offices to retain proper documentation for all waivers 

CMS Oversight of Waivers 9 OEI-03-00-00031 
CMS require States to track the amount of money they attempt to recover from 

third parties and the amount that is validly denied to assist in evaluating the costeffectiveness of both pay-and-chase and cost-avoidance efforts 

Agency Comments 

CMS concurs with our recommendation that the agency should improve its oversight of 

the cost-avoidance waiver process. CMS also concurs with our recommendation that States 

should track the amount they attempt to recover from third parties and the amount that is validly 

denied. However, CMS added that requiring States to track these amounts would produce little 

additional information of value, while at the same time taking away needed resources regarding 

the implementation of Health Insurance Portability and Accounting Act (HIPAA) requirements. 

With the implementation of HIPAA electronic billing standards, CMS believes providers will be 

able to bill liable third parties more easily, thereby reducing Medicaid third-party recovery 

activities. CMS says that they will reassess the need to track the amount States attempt to 

recover from third parties and the amount that is validly denied within a few years of HIPAA 

implementation. 

In addition, CMS believes that our potential outstanding debt calculation may be significantly less 

than what is stated in our report. CMS noted that it is difficult to actually quantify the dollars at 

risk since there are many factors that affect this calculation. For instance, States “cast a wide net 

when seeking recoveries” because they do not always know if individuals have third-party 

insurance coverage nor do they know the extent of coverage. As a result, some third parties are 

not liable for the claims or liable for only a portion of the claim. In addition, States often do not 

receive responses from third parties regarding pursued claims. 

The full text of CMS’s comments is presented in Appendix B. 

OIG Response 

In terms of our potential outstanding debt calculation, we simply based our calculation on figures 

reported to us by States. We recognize the fact that States may be pursuing dollars that in the 

end are not owed by third parties. For this reason, we use the phrase “as much as” when 

referring to the potential outstanding debt estimate. Both the States and CMS would have a 

more accurate picture of the amount owed to the States if CMS were to implement our 

recommendation that States track the amount they attempt to recover from third parties and the 

amount that is validly denied. These data would assist CMS in determining the costeffectiveness of cost-avoidance waivers. Furthermore, we believe that non-responses from third 

parties should not be a factor when calculating how much money is owed to the State. The 

State’s entitlement to recovery does not change if a liable third party has not responded to the 

State’s request for recovery. 

CMS Oversight of Waivers 10 OEI-03-00-00031 
APPENDIX A 

States with Cost-Avoidance Waivers as of December 2001

The table below presents the cost-avoidance waivers approved for States based on information from 

CMS regional offices. 

Region State Type of Service 

II NJ Intermediate Care Facilities for the Mentally Retarded 

Part B Services at State and County Hospitals 

III DC Pharmacy 

DE Pharmacy 

MD Pharmacy 

VA Pharmacy 

WV Pharmacy a 

IV AL Pharmacy 

FL Pharmacy 

GA Pharmacy a 

KY Pharmacy 

MS Pharmacy 

NC Pharmacy 

SC Part B Physician Crossovers 

Pharmacy 

TN Pharmacy a 

V IL Pharmacy a 

IN Pharmacy 

MN Pharmacy a 

OH Pharmacy a 

WI Pharmacy b 

VI LA Pharmacy 

OK Pharmacy 

TX Pharmacy 

Long-term Care a 

VII IA Pharmacy 

KS Community Mental Health a 

Long-term Care a 

Personal Care a 

Pharmacy a 

MO Adult Day Health Care c 

Care for Mentally Retarded/Developmentally Disabled 

Non-Emergency Transportation 

Personal Care 

Pharmacy 

Respite Care 

NE Long-term Care 

Pharmacy 

Private Duty Nursing 

CMS Oversight of Waivers 11 OEI-03-00-00031 
APPENDIX A 

Region State Type of Service 

VIII MT Audiology 

Dental 

Home and Community-Based Waiver Services 

Non-Emergency Transportation

Nursing Homes

Oxygen and Oxygen-related Services in Nursing Homes

Optometry

Personal Care 

Pharmacy 

ND Pharmacy Claims under $100 

SD Dental 

Optometry 

Pharmacy 

UT Home and Community-Based Waiver Services 

Long-term Care 

Non-emergency Transport 

Pharmacy 

Tort 

WY Care for Adults with Developmental Disabilities d 

Care for Children with Developmental Disabilities 

X AK Accommodations e 

Eyewear 

Home and Community-Based Waiver Services 

Personal Care 

Pharmacy 

Transportation 

ID Nursing Homes a 

Pharmacy a 

OR Intermediate Care Facilities for the Mentally Retarded a 

Institutes for the Mentally Diseased a 

Pharmacy 

School-based Rehabilitation Services a 

Targeted Case Management for Children in Foster Care a 

Targeted Case Management for the Developmentally Disabled a 

Source: CMS Regional Offices 

a While CMS reports the State has a waiver for this service type, the State reports it does not. 

b State reports it also has a waiver for its birth-to-three program and school disability program. 

c State reports it also has a waiver for Department of Mental Health annual evaluation. 

d State reports it also has a waiver for pharmacy claims and a waiver for long-term care/home and 

community-based services for the disabled and elderly. Documentation from CMS shows that these 

waivers have expired. 

e State reports it also has a waiver for dental claims. Documentation from CMS shows that the dental 

waiver request had expired. 

CMS Oversight of Waivers 12 OEI-03-00-00031 
APPENDIX B 

Centers for Medicare & Medicaid Services’s Comments

CMS Oversight of Waivers 13 OEI-03-00-00031 
APPENDIX B 

CMS Oversight of Waivers 14 OEI-03-00-00031 
APPENDIX B 

CMS Oversight of Waivers 15 OEI-03-00-00031 
ACKNOWLEDGMENTS 

This report was prepared under the direction of Robert A. Vito, Regional Inspector General for 

Evaluation and Inspections in Philadelphia, and Linda M. Ragone, Deputy Regional Inspector General. 

Other principal Office of Evaluation and Inspections staff who contributed include: 

David Tawes, Team Leader Linda Frisch, Program Specialist 

Tanaz Dutia, Program Analyst 

We would also like to acknowledge the following OEI staff for their assistance in this project: 

Christopher Gould, Region I

Vincent Grieber, Region II

Peggy Daniel, Region IV

Josiah Townsel, Region IV

Joseph Penkrot, Region V

Nancy Juhn, Region VI

Tricia Fields, Region VII

Christopher Tarbell, Region IX

CMS Oversight of Waivers 16 OEI-03-00-00031