I 

Department of Health and Human Services 

OFFICE OF 

INSPECTOR GENERAL 

MEDICAID PAYMENTS TO INSTITUTIONS


FOR PEOPLE WITH MENTAL


RETARDATION


I -JUNE 1993 OEI-O4-91-O1O1(I 

1 
EXECUTIVE SUMMARY


PURPOSE 

To determine the extent and causes of variation among States in per resident 

Medicaid reimbursement rates for large intermediate care facilities for people with 

mental retardation. 

BACKGROUND 

“IntermediateC are Facilities for the Mentally Retarded” (ICF/MRs)areMedicaid 

funded State or privately-run facilities for people with mental retardation or other 

developmental disabilities. Large ICF/MRsarethose with over 15 beds andare 

traditionally referred to as institutions. Seventy percentof all residents oflarge 

ICF/NIRsarein State-run facilities. 

To be certified to receive Medicaid reimbursement, ICF/MRs must annually meet 489 

Federal standards. The standards require that ICF/MRs provide 24-hour health care 

and continuous individualized training for residents. Federal Medicaid rules for 

reimbursing States for ICF/MRs are not clearly defined. Each State, therefore, defines 

the rules independently. 

The preferred treatment setting for people with mental retardation has shifted from 

large ICF/MRs to community-based care. Yet, in 1991 estimated Medicaid spending 

(including State and Federal shares) for large ICF/MRs reached $6.7 billion for 

approximately 110,000 residents. The average annual Medicaid reimbursement to 

large ICF/MRs was $61,000 per resident. Eight percent of Medicaid dollars are spent 

on 0.4 percent of Medicaid recipients who still reside in large ICF/MRS. 

We analyzed factors which affect per resident Medicaid reimbursement rates for large 

ICF/MRs in a stratified random sample of 22 States. 

FINDINGS 

Medicaid reimbumement rates for la~e ICF/h4Rsare more than jive times greater in some 

States than in others 

The average annual per resident Medicaid reimbursement for large ICF/MRs ranged 

among States from $27,000 to $158,000 in 1991. 

State Policia account for variation in ICF/A4R Medicaid reimbumernent rates among 

States, rather than qu.ulity of service, facility chamctektics, or r&t demographics 

The significant factors which cause some States to pay higher rates than others are 

State rate-setting methods, high wages paid to State employees, higher staff-to-resident 

1 
ratios, and newer facilities. States with lower reimbursement rates generally had 

included, in their rate-setting methodology, caps on costs or efficiency incentives to 

control costs. 

Wide variation in reimbursement rates is not due to differences in quality or level of 

service at facilities, as measured by ICF/MR certification standards. Facility 

characteristics, such as occupancy and size, and resident demographics, such as level of 

retardation, also did not account for the differences in rates among States. 

tick of @ective controls results in excessive spending 

Overstaffing and exorbitant spending for buildings and grounds occur at ICF/MRs in 

some States because Medicaid reimbursements are not effectively controlled. 

RECOMMENDATIONS 

HCFA shouid take action to reduce excessive spending of Medicaid @u&for ICFM2s. 

HCFA can accomplish this objective in several ways, including one or more of the 

following. 

HCFA can take administrative action to control ICF/MR reimbursement under 

current authorities. HCFA can encourage States to adopt cost controls, strengthen 

Federal rate-setting guidelines and provide technical assistance to States to help them 

adopt effective controls. 

HCFA can seek legislation to control ICF/MR reimbursement. Legislative options 

include mandatory cost controls, a Federal per capita limit, a flat per capita payment, 

a case-mix reimbursement, and a national ceiling for ICF/MR reimbursements. 

HCFA can seek comprehensive legislation to restructure Medicaid reimbursement for 

both ICF/MR and Home and Community-based waiver services for developmentally 

disabled people. Restructuring could include global budgeting, block grants, and 

financial incentives. 

We expect considerable savings to the Medicaid program depending on what option 

HCFA pursues. For example, we estimate that $683 million in Federal and State 

Medicaid funds could have been saved in 1991 by only capping costs. 

AGENCY COMMENTS 

The Assistant Secretary for Planning and Evaluation (ASPE) and HCFA commented 

on the report. ASPE concurred with the recommendations. While HCFA did not 

dispute our findings, they did not concur with the recommendations because they 

considered that the Medicaid statute and regulations allow them little discretion in 

imposing additional controls to curb ICF/MR payments. Further, HCFA stated that 

ii 
any legislative changes should be considered within the framework of national health 

care reform, which is still being developed. 

We continue to believe that HCFA should take action to control ICF/MR 

reimbursement. We have documented excessive Medicaid spending. Prudent 

management of Federal resources for ICF/MRs is important and will continue to be so 

under upcoming health care reform. Therefore, controls over unnecessary Medicaid 

spending should not be delayed. As we recommended, HCFA certainly can encourage 

States to adopt effective cost controls, can strengthen rate-setting guidelines, and can 

develop legislative proposals to control payments for ICF/MRs. 

... 

111 
TABLE OF CONTENTS


EXECUTIVE SUMMARY


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


FINDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...5


Wide Variation In Payment Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...5


Reasons For Variation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...6


Lack Of Effective Controls Results In Excessive Spending . . . . . . . . . . . . . . . . 9


RECOMMENDATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...11


AGENCY COMhmm’’s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...13


ENDNOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...14


APPENDICES


/bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..A-l


B: Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..B-l


C. Regression Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..C-l


D: Savings Calculation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..D-1


E Agency Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..E-1

INTRODUCTION 

PURPOSE 

To determine the extent and causes of variation among States in per resident 

Medicaid reimbursement rates for large intermediate care facilities for people with 

mental retardation. 

BACKGROUND 

What is an ICF/MR 

“Intermediate care facilities for the mentally retarded” (ICF/MRs) are State and


privately-run facilities for people with mental retardation. The Health Care Financing


Administration (HCFA) recognizes two categories of ICF/MR facilities. Those with 4


to 15 beds may be located in community settings and are generally referred to as small


ICF/MRs. Large ICF/MRs are those with over 15 beds. Across States, large


ICF/MRs average 160 residents per facility and are traditionally referred to as


institutions. State-run ICF/MRs are generally much larger than private ICF/MRs.


Seventy percent of all residents of large ICF/MRs are in State-run facilities.


Both State-run and private ICF/MRs must demonstrate annually that they meet


Medicaid’s conditions of participation. There are 8 conditions or categories of rules


encompassing 489 standards that facilities must meet to be certified. The standards


require that ICF/MRs provide 24-hour health care and continuous, individualized


training programs for their residents. States conduct annual surveys to assure the


requirements are met and are required to inform HCFA of any deficiencies.


Who is served in ICF/MRs 

People with mental retardation and related conditions are sewed in ICF/MRs. 

Medicaid guidelines refer to mental retardation as significantly subaverage general 

intellectual functioning existing concurrently with deficits in adaptive behavior and 

manifested during the developmental period. Persons with related conditions have 

severe, chronic disability that is attributable to cerebral palsy, epilepsy, autism, or any 

other condition closely related to mental retardation; is manifested before a person 

reaches age 22; is likely to continue indefinitely; and results in substantial functional 

limitations in at least three of six major life activities. The six activities are self-care, 

understanding and use of language, learning, mobility, self-direction, and capacity for 

independent living. The terms mental retardation or related conditions and 

developmental disabilities are generally used interchangeably. Over 90 percent of 

people with developmental disabilities who are receiving services are mentally 

retarded. 
How are ICF/iWRS jimded 

In 1971, the Medicaid program wasamended toprovide Federal reimbursement to


States forcaring forpeople tithmental retardation liting in institutions. Previously,


these institutions were financed solely by State, local and private funding. Over half of


the States applied to participate the first year. All States now have Federally-funded,


certified ICF/MRs.


In 1980, via the Boren amendments, Congress made significant changes in the


provisions for Medicaid reimbursement of long-term care facilities, including ICF/MRs.


The amendments direct States to pay all long-term care facilities on the basis of rates


which States assure are “reasonable and adequate to meet the costs which must be


incurred by efficiently and economically operated facilities...”. Congressional intent


behind the amendments was to give States more flexibility in developing rates, but not


to allow them to develop rates solely on the basis of State appropriations.*


Federal Medicaid rules for reimbursing States for ICF/MRs are not tailored


specifically to ICF/MR operations and are not clearly defined. Federal regulations do


not precisely define “reasonable costs” or “efficiently and economically operated


facility.” Each State, therefore, is allowed to define these terms independently.


The Federal regulations which address allowable costs and upper payment limits


require States to assure that the estimated average payment for ICF/MRs does not


exceed, in the aggregate, the amount that can “reasonably” be estimated would have


been paid for the same services under Medicare principles of reimbursement. The


Medicare law and guidelines specify that reimbursement must be based on the


“reasonable cost” of semices covered under the program and must be related to


patient care. Although ICF/MRs are not reimbursed under the Medicare program,


States are required to apply the Medicare principles and assure HCFA that they are


only reimbursing providers for “reasonable costs” incurred in providing care.


What are the trends in serving people with developmental disabilities 

The preferred setting for treating people with developmental disabilities has shifted 

from institutional to community-based care. A number of studies have shown that 

clients with developmental disabilities make better progress toward independent 

functioning in community rather than in institutional settings. 2 Accordingly, the 

Federal goal for people with developmental disabilities is to enable independence, 

productivity and community integration .3 This goal was most recently reiterated in 

the Developmental Disabilities Assistance and Bill of Rights Act of 1990. Since the 

ICF/MR program began 20 years ago, institutions have not only improved conditions 

in their facilities, but have discharged many residents who could live in a less 

restrictive community setting. Appendix A gives a bibliography of relevant studies. 

In 1981, Medicaid was amended to permit waivers for home and community-based 

(HCB) semices. Under HCB waivers, States may provide semices in a community 

2 
--

setting for persons who would othenvise be treated in an ICF/MR, if the average 

Medicaid cost per person is the same or less. Reimbursement for HCB care is costbased, as it is for ICF/MRs. However, HCFA limits the number of people that States 

may serve under HCB waivers. Incentives in the current reimbursement system are in 

conflict with the Federal goal of community integration. 

What are the present erpenditum for knge ICF/M& 

Despite the policy shift toward community-based treatment, most Federal Medicaid 

funds for people with developmental disabilities continue to be spent on large 

ICF/MRs. In 1991, States’ average annual expenditure in large ICF/MRs was ... 

$61,000 per resident 

Further, ICF/MR expenditures have been one of the fastest growing elements of the 

Medicaid program. Total Medicaid expenditures for large ICF/MRs have more than 

doubled over the last decade. Over the same period, th~ population in those 

institutions has steadily declined reduced by 28 percent in the State-run facilities 

alone. In 19914, estimated Medicaid expenditures (including State and Federal 

shares) for both State-run and private, large ICF/MRs reached ... 

$6.7 Billion for 110,000 Residents 1 

The chart belo# illustrates the disproportionate share of Medicaid dollars spent on 

people with developmental disabilities who still reside in large ICF/MRs. 

8% of Total Medicaid Dollars 0.4% of Total Medicaid Recipients 

04% 

3

We examined factors which affect per resident reimbursement rates for large 

ICF/MRsin22 States. Weoriginally selected 24 States through stratified random 

sampling, but dropped 2 that did not respond to our survey. 

We suxveyed Medicaid agencies in each of our sample States to obtain current 

(1) Medicaid reimbursement rates for each large ICF/MR, (2) rate-setting methods, 

and (3) ICF/MR expenditures, including average wage, percent of State central office 

overhead costs allocated to an ICF/MR, and capital expenditures. We obtained 

resident and facility characteristics from HCFA’S On-line Survey and Certification 

Reporting System (OSCAR). 

To determine the extent of reimbursement rate variation among States, we compared 

the average facility per diem rates as reported to us by State Medicaid agencies. 

To determine causes of variation among States in reimbursement rates, we performed 

a stepwise regression analysis using only State-run facilities. We examined 24 factors 

or independent variables pertaining to (1) facility characteristics, (2) resident 

demographics, and (3) State reimbursement policies. We used the SAS (Statistical 

Analysis System) software program to perform the stepwise regression. 

We completed site visits to 15 ICF/MR facilities in 7 States. In each State we selected 

at least one State-run and one privately-run large ICF/MR, where available, to 

determine how ICF/MRs are using Medicaid dollars. We interviewed staff at State 

Medicaid agencies and State Developmental Disabilities agencies. Appendix B gives a 

detailed description of the methodology. 

our review was conducted in accordance with the Quality Standards for Inspections 

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

4

FINDINGS


MEDICAID REIMBURSEMENT RATES FOR LARGE Ic’F_ ARE MORE 

THAN FIVE TIMES GREATER IN SOME STATES THAN IN OTHERS 

Average Medicaid reimbursement in 1991 for large ICF/MRs ranged among States 

from $27,000 to $158,000 per resident. In 1991, the average reimbursement for all 

large ICF/MRs was $61,000 per resident. The following chart illustrates widely varying 

State average annual per resident reimbursement rates for both private and State-run 

large ICF/MRs combined. 

Annual Per Resident Reimbursement Rate 

By State, 1991 

Over 

$100,000 

.................... ................... .. $90,000 

.................... ...................... .................................................................... $80,000 

.................... .................................................................... $10,000 r 

....... 

22 Sample States 

5

� 

. ..—. — ~ . 

~ATE POLICIES ACCOUNT FOR VARIATION IN ICF/MR MEDICAID 

REIMBURSEMENT RATES AMONG STATES, W4THER THAN QUALITY OF 

SERVI~ FACILITY c’HAIWC193RISTICS OR RESIDENT DEMOGRAPHICS 

We examined characteristics of ICF/MR facilities and their residents, such as size of 

facility and severity of disability, because we expected these factors to significantly 

affect ICF/MR reimbursement rates. Further, in general discussions, we were 

frequently told that variation in rates was due to differences in quality or level of 

semice. We found that State reimbursement policies caused most of the variation, 

however, not quality of care or facility and resident characteristics. 

State Policies Account for Most Variation in ICF/MR Medicaid Reimbursement Rates 

Among States 

The most significant causes of variation in lCF/MR Medicaid reimbursement rates 

were rate-setting methods, wages, and staff-to-resident ratio. The age of a faciliw also 

caused significant variation in reimbursement rates. Based on our regression analysis, 

these factors explain 75 percent of the variation in reimbursement rates. These 

factors are controllable by States. 

Rate-setting Methods 

Federal Medicaid law and regulations require States to describe the rate-setting 

method in their Medicaid State Plans, but do not specify what that method will be. 

Not surprisingly, States employ widely different methodologies. Our analysis showed 

that State reimbursement rate policies accounted for variation in rates. States with the 

lower rates 

apply limits or caps on costs in calculating reimbursement rates, 

� give efficiency incentives to encourage cost control, 

� do not reimburse based on a minimum occupancy, and 

�	 have a lower proportion of State central office overhead costs allocated to 

individual ICF/MR budgets. 

States that use caps may apply them to specific cost centers (e.g., maintenance.


dietary, routine services) or to aggregate costs. Frequently, a cost center cap is set by


(a) ranking all the ICF/MRs based on their reported costs in that cost center, and


(b) selecting a level for the cap. For example, one State caps the cost centers for


administration, room, and board at 110 percent of the median costs of all large


ICF/MRs in the State.


In addition, some States give facilities an incentive to keep costs down. For example,


facilities were allowed to keep a poruon of the difference between their actual costs


6 
and the allowed amount under specific caps. The amount of the efficiency incentive 

ranged from 10 to 75 percent. 

Some States reimburse facilities based only on actual patient days. Other States base 

reimbursements on a minimum occupancy, generally 80 or 90 percent of capacity, if 

actual patient days are less. States that do not use a minimum occupancy adjustment 

have lower reimbursement rates. 

States allocate a portion of State-level administrative costs to the ICF/MRs. The 

percent of reimbursement for State administrative costs ranged from less than 1 to 12 

percent. Those States with a smaller proportion of State administrative costs allocated 

to ICF/MR facilities had lower reimbursement rates. 

Wages 

The wage level of ICF/MR employees was a very influential factor affecting 

reimbursement rates. The lower the wages, the lower the reimbursement rates. The 

large State-run ICF/MRs we examined are staffed with State government employees; 

therefore, the wage levels are determined by the State rather than the facility. 

Average annual wage, including fringe benefits, for direct care workers at State-run 

large ICF/MRs ranged from $14,000 for the State with the lowest average 

reimbursement rate to $47,000 for the State with the highest rate. 

Staff-to-Resident Ratio 

A major expense for ICF/MRs is their staff. The number of staff each facility employs 

and how much they are paid strongly influences what a facility’s reimbursement rate 

will be. Our analysis confirmed that ICF/MRs with lower staff-to-resident ratios have 

lower rates. In one of the States with high reimbursement rates the staff-to-resident 

ratio was three to one, while in a State with a lower rate the ratio was one to one. 

Facility Age 

The final factor that our regression analysis showed had a statistically significant


influence on reimbursement rates was age of the facility. We used the date each


facility was certified to participate in the ICF/MR program as a proxy for age. The


older its certification date, the lower its rate. This may be due to the way States


reimburse ICF/MRs for capital costs. For example, in one State, capital costs for its


newer facilities resulted in higher reimbursement rates.


Wide Differences in ICF/MR Reimbursement Rates Are Not Due to Quality of


Service, Facility characteristics, or Resident Demographics


We included characteristics of ICF/MR facilities and their residents, such as size of


facility and severity of disability, in our regression analysis because these factors could affect


7

Such variables, 

account for the 

however, were not statistically 

wide differences in reimbursement 

ICF/MR reimbursement rates. 

significant; that is, they did not 

rates among States. 

Quality and Level of Service 

Quality and level of service as measured by ICF/MR certification standards did not 

cause wide variation in reimbursement rates. All facilities in our sample had passed 

their most recent annual sumeys and been certified as having met the Federal 

operating and program standards. The 489 standards by which ICF/MRS are 

evaluated are the only measure of quality used to authorize or deny payment of 

Medicaid funds. Although it is difficult to measure quality, HCFA’S quality of care 

standards require that each (1) resident receive continuous active treatment according 

to a detailed, individualized training plan, aimed at increasing independence, and (2) 

facility meet specified management, staffing, treatment, client rights, health, diet, and 

safety requirements. Since 1988, Federal guidance has directed State surveyors of 

ICF/MRs to focus on implementation of the active treatment requirement. 

Our regression analysis showed that level and quality of service, as measured by 

ICF/MR certification standards, did not significantly affect reimbursement rates. 

Further, our on-site visits to 15 lCF/MRs in 7 States confirmed this finding. We 

observed little difference in quality and level of care in facilities with the highest rates 

and those with the lowest. 

Facility Charactetitics 

Our regression analysis showed that the following facility characteristics of the


ICF/MRs were not significant in explaining the wide variation in reimbursement rates.


. size, as measured by number of residents


. percent of employees in direct care


� number of discrete living units


� occupancy rate (number of beds divided by number of residents)


� percent of all beds in a facility that are ICF/MR-certified


Resident Demographics 

For each ICF/MR, we included in our regression analysis the percent of residents


� with profound retardation,


. over age 65,


� under age 22,


� who are blind or deaf,


� who are nonambulatory.


� attending off-campus day programs, and


� using medication to control behawor.


8 
None of these resident characteristics had a statistically significant effect on the wide 

variation among States in reimbursement rates. For example, differences among 

States in the proportion Of residents who are nonambulatory or profoundly retarded 

did not account for the wide variation in reimbursement rates. 

Appendix C contains details of the results of the regression analysis. 

LACK OF EFFECTIVE CONTROLS RESULTS IN EXCESSIVE SPENDING 

Although some States have established effective controls and have lower


reimbursement rates, in other States ICF/’MR reimbursement rates may have exceeded


a level necessary to provide required care. In the 15 ICF/’MRs we visited, the


prevailing attitude is that funding is not a problem. In an era when most Medicaid


providers are being cut back and States are faced with budget shortfalls, virtually all


ICF/MR administrators said they have sufficient funds. As one State administrator


commented, any request for funds 1s rubber stamped, even if it is excessive.


States place fewer controls, in particular, on their State-run large ICF/MRs than on


their other Medicaid providers. For example, all States apply limits or caps on costs


when setting reimbursement rates for their nursing homes and 78 percent of States


cap costs for their private ICF/’NfRs. Yet, only a third of the States use such cost


control methods when setting reimbursement rates for their State-run ICF/’MRs.


Across States, the average, annual, per resident reimbursement for State-run large


ICF/MRs ($77,000) is almost double the average for large private ICF/MRs ($42,000).


Furthermore, in the privately-owned lCF/MRs we visited, cost controls had not forced


cuts in services; rather, they had forced the ICF/MRs to operate more efficiently.


In some of the 15 facilities we visited, we observed the products of uncontrolled.


excessive reimbursements, notably in staffing and buildings and grounds. In one State


that has a high reimbursement rate, a State program official said that they were


spending dollars on staff and buildings with no attendant improvement in quallty of


care.


staffing 

In some facilities with higher-than-average reimbursement rates, the average staff-toresident ratio is 50 percent higher than the national average. Further, our analysls Of 

annual Medicaid survey data shows that the more employees per resident a facll]ty 

has, the lower the percent of staff there are in direct care. For example, in one hlghcost facility, an administrator commented that their four-fold increase in recordkeepmg 

staff had not increased resident care. 

In the States we visited, those with the highest reimbursement rate not only hire more 

staff, but hire professionals with ~d~anced degrees to do the same jobs that are being 

done effectively by skilled staff without t’ormal degrees in States with lower ra[es. 

Some States, for example, use volunteer foster grandparents while others employ full9 
� 

time degreed professionals to supemise residents when they are not engaged in formal 

training routines, 

Extra staff does not necessarily improve resident outcomes. Outcomes are less 

affected by numbers of staff, than how they are deployed. Our analysis shows virtually 

no correlation between staff to resident ratios and the number of deficiencies on 

annual certification surveys. At one ICF/MR, we were told that correction of most 

certification deficiencies requires better management of staff, not added staff. The 

administrator at another ICF/MR commented that if staff do everything for residents, 

prepare food, do laundry, etc., as is done in large institutions, residents do not have 

the opportunity to develop independent living skills. 

Buildings And Grounds 

As shown by the following illustrations, Medicaid funds are used to help maintain large 

and sometimes exorbitant ICF/MR buildings and campuses. 

Two of the 15 ICF/MRs we visited maintain what they called hospitals on 

campus. The hospitals were fully staffed with physicians and nurses, yet surgery 

and inpatient care are obtained at nearby community hospitals. 

�	 Another ICF/MR that was slated to close in 3 years is building a $7.2 million 

food service building. 

�	 At another ICF/MR major renovations to dormitory buildings are undenvay 

despite plans for closure in a few years. 

�	 Many ICF/MRs maintain hundreds of acres of grounds which in some cases are 

used for recreational activities by the neighboring community, more than by the 

ICF/MR residents. 

10

RECOMMENDATIONS


HCFA SHOULD TAKE ACTION TO REDUCE EXCESSIVE SPENDING OF 

MEDICAID FuNDS FOR ICF~S. 

HCFA can accomplish this objective in several ways, including one or more of the 

following. 

HCFA can take adrninistrotive action to control ICFIMR reimbunement under current 

authon”ties. Conceivably, administrative controls can forestall a need for legislative 

action. However, HCFA should take administrative actions in the interim even if it 

chooses to develop legislative proposals. Following are examples of specific 

administrative actions. 

HCFA


Administrative Cost Controls: Encourage States to adopt effective cost controls 

for ICF/MRs. HCFA can do so by: strengthening Federal rate-setting 

guidelines, such as those on upper payment limits; periodically producing a 

compendium of cost containment mechanisms successfully used by States to 

control ICF/MR expenditures; and providing technical assistance to State 

Medicaid agencies to help them adopt methods used by other States with 

effective controls. 

can seek legislation to control ICF/ikfR reimbursement. Following are several 

examples of legislative options. 

Mandato~ Cost Controls: Require States to implement effective cost control 

mechanisms in their ICF/MR rate-setting methodology as a condition for 

receiving Federal financing. The legislation could specify the kinds of controls, 

such as caps on costs, or efficiency incentives. 

Federal Per Capita Limit: Limit Federal financial participation for each 

resident of an ICF/MR. The Federal government would match State payments 

up to a maximum amount per resident. State expenditures beyond that amount 

would not be eligible for Federal matching payments. 

Flat Per Capita Payment: Set a specific Federal per capita payment amount 

for residents of ICF/MRs. States would receive a flat amount for each resident 

of an ICF/MR regardless of how much States spend. In addition to helping 

control Federal expenditures, this would allow States to budget for Federal 

funds based on their institutionalized developmentally disabled population. 

Case-mix Reimbursement: Develop a reimbursement system for residents of 

ICF/MRs based on the functioning level of the residents and the level of care 

provided to them. Specific payment amounts would be based on a facility’s 

case mix of residents and the programs being provided for them. This option 

11 
would refine the typical State reimbursement methodology which reimburses 

facilities at the same rate per resident regardless of residents’ needs or level of 

care being provided. 

National (Ming for ICF/MR Reimbursemenfi: Cap total Federal 

reimbursements for ICF/MR services. States would be allocated a sPecific 

amount under the cap regardless of any State program changes. 

HCFA can seek comprehensive legislation to restructure Medicaid reimbunement for both 

ICFIMR and Home and Communip-based (HCB) waiver services for developmentally 

disabled people. Restructuring would combine institutional and community-based 

Medicaid expenditures under one authority and remove the current reimbursement 

incentive that favors institutional over community spending. HCFA could expand one 

or more of the ICF/MR-specific options listed above to include community-based care 

or select one of the following broad legislative options. 

Global Budgeting for Developmentally Disabled Recipients of Medicaid 

Setices: Combine all Federal ICF/MR and HCB waiver funding under one 

authority. To compute the amount of Federal funds each State would receive, 

HCFA could negotiate a dollar cap with the States. 

Block Grants: Provide a grant to each State for operating institutional and 

community-based programs for its developmentally disabled citizens. This 

option offers States flexibility; however, the legislation should assure that 

Federal program requirements continue to be enforced. 

Financial Incentives: Offer States financial incentives to move residents out of 

institutions and into lower cost community-based care. An incentive system is 

consistent with existing Federal program policy preferences for communitybased care. The program would be structured to ensure that savings from 

more cost efficient operations exceed the amount of incentives offered. 

The above options are not intended to be an all inclusive list for reducing excessive 

spending for ICF/MRs. However, we estimate considerable savings to the Medicaid 

program from implementing one or more of the suggested options. To illustrate, we 

estimate that $683 million in Federal and State Medicaid funds could have been saved 

in 1991 by implementing only the cost control method of capping costs. Potential 

savings from implementing other options would depend on how the options are 

implemented. For example, if a Federal per capita limit for ICFNRS were set at no 

more than the current average annual reimbursement rate of $61,000, we estimate 

$565 million in Federal and State Medicaid funds could have been saved in our 

sampled States in 1991. Appendix D shows how we estimated savings. 

12

AGENCY COMMENTS


We circulated the draft report for comment to the Administrator of the Health Care


Financing Administration (HCFA), the Assistant Secretary for Planning and


Evaluation (ASPE), and the Assistant Secretary for Management and Budget (ASMB).


Appendix E shows the full text of the comments provided by ASPE and HCFA.


ASMB did not comment on the report.


The ASPE concurred with our recommendations but expressed concern that they


could appear to some readers of the report as an unfounded attempt to reduce total


spending on behalf of people with mental retardation. To clarify, our


recommendations are targeted to reduce only excessive spending which we found does


not affect the quality of care for residents of ICF/MRs. In response to ASPE’S


technical comments, we made changes to clarify our information where necessary.


The HCFA did not dispute our report findings but did not concur with our


recommendations. They stated that the Medicaid statute and regulations allow little


discretion in imposing additional administrative controls to curb ICF/MR payments


and that legislation would be needed to implement the other options we


recommended. Further, HCFA stated that any legislative changes should only be


considered as part of the Administration’s national health care reform, which is still


under development.


We continue to believe HCFA should take action to control reimbursement and


ensure that Medicaid payments for lCF/MRs are reasonable. We have documented


unnecessary Medicaid spending at ICF/MRs. HCFA certainly can encourage States to


adopt effective cost controls for lCF/MRs, can strengthen rate-setting guidelines, and


can develop specific legislative proposals and submit them for Departmental review.


We believe prudent management of Federal resources for ICF/MRs is important and


will continue to be so under the Admlnlstration’s upcoming national health care


reform. Therefore, controls over unnecessary Medicaid spending should not be


delayed, particularly during this perwd of financial crisis for the Medicaid program.


13

--

ENDNOTES


1. House Report No. 96-1479 (p. 154) on H.R. 7765, the “Omnibus Reconciliation 

Act of 1980,” Section 962 of P.L. 96-499. 

2. See Bibliography for exact citations of studies conducted by Conroy, and Bradley; 

Nerney, Conley, and Nisbet; and Moscovitch. These are just a few of the studies on 

this issue. Many more are cited in the report by Robert Helms, Assistant Secreta~ 

for Planning and Evaluation. 

3. In the 1990 reauthorization of the Developmental Disabilities Assistance and Bill of 

Rights Act, one of the stated purposes of the law is, “to enable [persons with 

developmental disabilities] to achieve their maximum potential through increased 

independence, productivity, and integration into the community.” 42 U.S. C., section 

6000, (b)(l). 

4. To estimate total 1991 Medicaid expenditures, we multiplied the average 

reimbursement per resident, obtained from our State survey, by the number of 

residents in ICF/MRs over 15 beds. The latest available data for residents in facilities 

over 15 beds is 1990 110,548. The resident data was obtained from the Recurring 

Data Set Project of the Center for Residential Services and Community Living, 

University of Minnesota, K.C. Lakin. We reduced the 1990 figure and used 110,000 as 

an estimate for 1991, a conservative reduction of 0.5 percent. 

5. To calculate the percentage of total Medicaid dollars and recipients attributable to 

large ICF/MRs, we referred to HCFA’S Form 2082 which reports the total vendor 

payments and total recipients for all Medicaid for Fiscal Year 1991. We then divided 

the expenditure and recipient figures we use in the report for large ICF/MRs ($6.7 

billion and 110,000, respectively) by the Medicaid totals from the HCFA Form 2082. 

14

APPENDIX A


BIBLIOGRAPHY 

Braddock, David. Federal Policv toward Mental Retardation and 

Developmental Disabilities. Baltimore, Md.: Paul H. Brookes Publishing Co., 1987. 

Braddock, David, Hemp, Richard, Fujiura, Glenn, Bachelder, Lynn, and 

Mitchell, Dale. The State of the States in Developmental Disabilities. Baltimore, 

Md.: Paul H. Brookes Publishing Co., 1990. 

Braddock, David, Hemp, Richard, and Fujiura, Glenn. “National Study of 

Public Spending for Mental Retardation and Developmental Disabilities,” American 

Journal of Mental Deficiency, 1987, vol. 92, No. 2, pp. 121-133. 

Boggs, Elizabeth M. “Legal, Legislative, and Bureaucratic Factors Affecting 

Planned and Unplanned Change in the Delivery of Services to the Mentally Retarded” 

in Begab, Michael J., and Richardson, Stephen A., eds. The Mentallv Retarded and 

Societv: A Social Science Perspective. Baltimore, Md.: University Park Press, 1975. 

Conroy, J. W. and Bradley, V. J. (1985). The Pennhurst Longitudinal Studv: A 

re~ort of five vears of research and analysis. Philadelphia: Temple University 

Developmental Disabilities Center. Boston: Human Services Research Institute. 

Conroy, J. W., Dickson, M. M., and Lemanowicz, J. A. Pennsylvania Waiver 

Evaluation: Results of the Independent Assessment of Pennsylvania’s Home and 

Communitv-Based Services Waiver Pro~ram in the Area of Mental Retardation. 

Philadelphia: Temple University Developmental Disabilities Center/UAP, Research & 

Quality Assurance Group, July 1989. 

Ellis, Norman and Bray, Norman, eds. International Review of Research in 

Mental Retardation. Orlando, Florida: Academic Press, Inc., 1984. 

Helms, Robert B., Chairman and Assistant Secretary for Planning and 

Evaluation. Renort from the Workinu Group on Improving Public Policies and 

pro~rams Affectin~ Persons with Mental Retardation and Other Developmental 

Disabilities, Washington, D. C., U.S. Department of Health and Human Services, 

December 1988. 

Lakin, K. Charlie, et al. “Longitudinal Patterns in ICF/MR Utilization, 1977-

1986,” Mental Retardation, 1989, Vol. 27, No. 3, pp. 149-158. 

A-1

Lakin, K. Charlie, Kimm, Christina, Li, Xiaoming. “The Costs of State 

Institutions in the United States and Factors Associated with Variability,” University of 

Minnesota, Research and Training Center on Residential Services and Community 

Living, Institute on Community Integration/UAP. 

Lakin, K.C., White, C.C., Prouty, R.W., Bruininks, R.H., and Kimm, C. (1991). 

Medicaid Institutional fICF-MR) and Home and Community Based Services for 

Persons with Mental Retardation and Related Conditions (Report No. 35). 

Minneapolis: University of Minnesota, Center on Residential Setices and Community 

Living. 

Moscovitch, Edward. Mental Retardation Programs: How Does Massachusetts 

Compare? Boston, Massachusetts, Pioneer Institute for Public Policy Research, 1991. 

Nerney, Tom, Conley, Ron, and Nisbet, Jan. A Cost Analvsis of Residential 

Svstems Seting Persons with Severe Disabilities: New Directions in Economic and 

Policv Research. Cambridge, Massachusetts, Human Services Research Institute. 

Smith, Gary A., and Gettings, Robert M. The HCB Waiver Program and 

Semites for People with Developmental Disabilities: An U~date. Alexandria, 

Virginia, National Association of State Mental Retardation Program Directors, Inc., 

January 1991. 

A-2

APPENDIX B


METHODOLOGY 

Sample Selection 

Our population included 48 States and the District of Columbia. Wyoming and 

Arizona were excluded because they participated in the ICF/MR program for only 

part of the 1981 to 1990 period we used for stratification. 

For a regression analysis, we stratified States by percent change in number of residents 

of all large ICF/MRs (over 15 beds) between 1982 and 1990. We placed each of the 

48 States and the District of Columbia in one of three strata. 

1) Large decrease in residents (26% - 78%) 

2) Moderate decrease in residents (1% - 25%) 

3) Increase in residents 

By stratifying and then randomly choosing States from each strata, we assured that our


sample included States that are pursuing different policies regarding the size of their


institutions. The amount of decrease in institutional residents reflects differing State


policies on downsizing institutions and increasing community-based care. We obtained


the number of residents in ICF/’MRs from the Recurring Data Set Proj?ct of the


Center for Residential Sexvices and Community Living, University of Minnesota,


K. Charlie Lakin.


We then selected 24 States through random sampling. Within these States, we


included all large ICF/MRs.


Two States did not respond to our survey questionnaire, reducing the sample from 24


States and 399 large ICF/MRs to 22 States and 380 large ICF/MRs. Of the large


ICF/MRs in the sample, 117 were State-run and 263 were private.


For site visits, we arrayed the 22 sampled States according to percent change in


(1) number of residents between 1982 and 1990, and (2) expenditures for large


ICF/MRs between 1981 and 1988 (latest available data). We placed the States in two


strata based on change in expenditures, We obtained the expenditure data from a


study done by the University Affiliated Program, University of Illinois at Chicago,


Dave Braddock, et.al., 1989.


B-1

The following matrix illustrates the 6 categories (cells) our bracketing created and the 

number of sampled 22 States in each cell. 

SAMPLING MATRIX 

I 

I % CHANGE IN ICF/MR RESIDENTS 

I Large Moderate 

Decrease Decrease Increase —-. 

% CHANGE IN ~ 

Smaller 

Increase 4( i3 2 

TOTAL ICF/MR ~ Larger EXPENDITURES 1 Increase 4 5 4 .-

For our site visits, we then randomly selected one State from each cell, a total of six 

States. We selected States this \va} to assure that we visited States that represent 

wide differences in expenditure :lnd resident trends. In addition we visited one State 

to test our data collection instruments. t’or a total of seven States selected for site 

visits. 

Data Collection 

We collected data from the following t’our sources. 

1)	 The On-line Sumey. Certification and Reporting System (OSCAR) 

maintained by HCFA 

2) A mail survey of State Jfedicaid agencies 

3) Interviews with State [Jfficiais in seven States 

4) Site visits to 15 large ICF ‘\lRs 

The OSCAR database contains detailed information on ICF/MRs. These data are 

updated at least once a year when a facility is sumeyed for Medicaid recertification. 

We compiled a database, using dBase 111+, consisting of variables from the OSCAR 

file for all the facilities in our 22 sample States. The variables identified the facilities, 

including whether they were private or State-run, and described the residents and the 

facilities. We also used existing OSCAR data to create new variables, such as staff-toresident ratio. 

We compiled a second database !r,~m !hc results of a State sumey. We asked each 

State Medicaid agency to answer qucs[l,]ns concerning (1) reimbursement rate for 

each facility for State Fiscal Year 1W 1, (2) how States set reimbursement rates for 

both State-run and private ICF,\fRS. {3J average wage for direct care workers at 

State-run and private ICF/MRs. iind i 4 ) percent of reimbursement for capital, 

administration, and State centra office (>verhead allocated to ICF/MRs. ‘When 

1 
-- --

-- --

needed for clarification, we requested that States also send supporting documents


describing their rate-setting methodologies.


Finally, we visited seven States and, using structured guides, intewiewed


Developmental Disabilities program staff, and, in most cases, State Medicaid agency


staff involved in setting ICF/MR rates. We also visited at least one State-run and one


private ICF/MR, where available, in each State, toured the facility, and intewiewed


staff.


Data Ana$wb 

To determine the extent of variation in reimbursement rates, we computed each 

State’s average rate and compared those across States. We used analysis of variance 

to confirm that there was significant variation in rates among States. 

To determine causes for variation in rates, we completed a regression analysis. We 

constructed and tested a model consisting of 24 independent variables to determine 

which variables affect the reimbursement rate (dependent variable). 

The independent variables are listed below by three categories. Following each 

variable, in parentheses, is an abbreviated title that we used for our regression analysis 

described in Appendix C. 

Facility Characteristics 

1) Size, measured by number of residents (Size) 

2) Number of discrete living units (# Units) 

3) Occupancy rate number“ beds ‘divided by number residents (Occup. ) 

4) Percent of all beds in a facility that are ICF/MR certified (% ICF/MR) 

5)	 Age of facility date began participation in the ICF/MR program 

(Part.date) 

6) Percent of employees working in direct resident care (% DirCare ) 

7)	 Total number of deficiencies on the facility’s last annual Medicaid 

certification smwey (De fies.) 

8) Total staff-to-resident ratio (StffRes) 

Resident Characteristics 

Percent of residents 

1) with profound retardation (70ProRtrd) 

2) over age 65 (%Over 65) 

3) under age 22 (% Under 22) 

4) who are blind or cleat’ (7c Bid/Deaf) 

5) who are nonambulatory (% Nonambu) 

6) attending off-campus day programs (% DayProgs) 

7) using medication to control behavior (%onDrugs) 

B-3 
--

--

State Reimbursement Policy Factors 

1) Limits or caps on allowable costs (Caps) 

2) Efficiency incentive (Incentive) 

3) Minimum occupancy’ adjustment (OccAdjmt) 

4) Amount of cost of living adjustment (COLA) 

5) percentage of total reimbursement for capital expenditures (Capital) 

6) Percentage of total reimbursement for administration (Admin.) 

7)	 Percentage of total reimbursement for State, central office overhead 

allocated to the ICF/MRs (Overhead) 

8) Average wage of direct care staff (Wage) 

9)	 Per capita State spending for all services total direct general 

expenditures for the State divided by total residents, based on data 

obtained from the U.S. Bureau of the Census, Government Finances, 

Series GF, No. 5, annual (PerCapSp.) 

Our regression analysis included only State-run facilities. We did not complete a 

regression analysis of the private ICF/MRs because many States were unable to 

provide data on wages, proportion of reimbursement for capital, administration and 

central office costs. 

We did not validate the OSCAR database prior to our analysis. 

We used a linear regression analysis to determine which of the above variables 

significantly affected Medicaid expenditures for ICF/MRs. This method uses the data 

from the independent variables to explain variation of the dependent variable. Linear 

regression fits a straight line to the data using the method of least squares. Below is 

the equation for the general model. 

Y=po+p1x1+p2x2+. . .pJk+(3 

In this equation, Y, the dependent variable, is the per diem reimbursement rate. The 

X’s, the independent variables, are the variables listed above that we included in the 

model (the facility and resident characteristics, and State reimbursement policy 

factors). The Betas are values calculated as a result of the regression and show the 

influence of each factor on the reimbursement rate. The Beta values are reported in 

Appendix C under Parameter Estimate. The epsilon represents the residuals, the 

difference between the obsewed and the predicted values according to the model. 

B-4

APPENDIX C


REGRESSION RESULIX 

We used SAS (Statistical Analysis System) software for the regression analysis. The 

SAS program eliminates all data for an observation with missing values. We did not 

receive complete information for 20 State-run facilities. Therefore, the regression 

model was computed using 97 of 117 selected State-run ICF/MRs. 

The following table shows the overall regression results of our full model, i.e., with all 

24 variables. It includes the estimate, standard error, t-value for all variables and the 

significance level (probability > It I). The t-value for each variable tests for the effect 

of each independent variable on the dependent variable. The last column gives the 

probability of the t-value. The t-values and the associated probabilities (probability > 

It I) test the hypothesis that the parameter is actually zero and answers the question: 

If the true slope and intercept were zero, what would the probability be of obtaining, 

by chance alone, a value as large or larger than the one actually obtained? 

Variable 

Intercept 

Caps 

con 

incentive 

OccAdj nk 

Wage 

Capital 

Overhead 

Admin. 

Part. date 

PercapSp. 

Def ics. 

Size 

# Units 

Occup . glCF/MR 

%Bld/Deaf 

%DayProgs 

%onDrugs 

%ProRtrd 

Stff:Res 

%DirCare 

%Undr22 

%Over65 

%Nonambu 

STATE FACILITIES FULL MODEL 

Parameter Standard 

Estimate Error t-Value 

-141.94 151.25 -0.938 

-32.69 20.58 -1.589 

3.11 2.64 1.177 

-76.82 25.07 -3.064 

110.35 27.56 4.004 

.003 . 0009 3.166 

-2.08 3.93 -0.529 

3.60 4.16 0.867 

-1.84 1.20 -1.536 

2.86 1.63 1.751 

. 003 0.02 0.136 

0.57 0.32 1.778 

-0.01 0.03 -0.423 

-0.62 0.68 -0.909 

-0.04 0.08 -0.444 

0.57 1.45 0.391 

1.74 68.51 0.025 

-21.18 34.52 -0.614 

-14.82 35.82 -0.414 

-17.53 26.14 -0.670 

30.04 10.34 2.904 

-2.76 29.13 -0.095 

-30.71 38.70 -0.794 

1.60 54.12 0.030 

14.23 16.17 0.880 

Probability > Itl 

0.3511 

0.1165 

0.2429 

0.0031 

0.0001 

0.0023 

0.5983 

0.3889 

0.1288 

0.0843 

0.8920 

0.0797 

0.6737 

0.3665 

0.6581 

0.6971 

0.9798 

0.5414 

0.6802 

0.5048 

0.0049 

0.9248 

0.4300 

0.9765 

0.3817 

c-1 
The R-square term indicates the percentage of the variation explained by the model. 

The R-squared value and adjusted R-squared values of.80 and .73, respectively, 

indicate that 73 percent of the variation in per resident reimbursement rate in Staterun facilities is explainedby the full model. 

Redllced mudt?l 

Next, we performed astepwise regression in order to find the model which explains 

the greatest amount of the variation in the dependent variable with the fewest number 

of independent variables. Most variables that-were statistically significant in the full 

model were also significant in the stepwise regression, However, in the regression 

model building process, the statistical significance of the independent variables may 

change in the reduced model. The following table shows the results of the stepwise 

regression. As shown in this table, all eight independent variables in our reduced 

model were statistically significant at the .01 level. We examined the residuals and 

found that they were normally distributed. 

of the 24 independent variables, only the following 8 variables were statistically 

significant. These 8 variables explain 75 percent of the variation in the dependent 

variable. The regression modelproducedan R-squareof .77and an adjustedRsquareof .75. 

STATE FACILITIES REDUCED MODEL


Parameter Standard Probability 

Variable Estimate Error t value > ;t~ 

Intercept -198.19 122.10 -1.62 .1081 

Caps -33.16 13.20 -2.51 .0138 

Incentive -88.59 19.95 -4.44 . 0001 

OccAdjmt 145.89 17.69 8.25 .0001 

Wage 0.0026 0.0006 4.28 .0001 

Overhead 7.70 2.54 3.04 .0031 

Admin. -3.01 0.87 -3.47 .0008 

Part.date 3.55 1.40 2.54 .0129 

Stff:Res. 26.05 6.95 3.75 .0003 

c-2 
APPENDIX D


COST 

1. 

2. 

3. 

4. 

5. 

SAVINGS CALCULATION 

CONTROLS 

From our sample, we determined that 73 percent of residents in State-run 

ICF/MRs are in States where the rate-setting methodology does not include 

caps on costs. 

Based on data from the Recurring Data Set Project, there were 77,281 

residents in all State-run large lCF/MRs in 1990. 

77,281 residents x 73 percent = 56,415 residents are in State-run large 

ICF/MRs in States without c:]ps. 

The regression results sh{~wcd th:lt, controlling for all other variables in our 

model, States that applied c:ips In their rate-setting methodologies had 

significantly lower per die m r:ltes. The cumulative effect of caps over time was 

a reduction in the per diem rate of $33.16 per resident on average, or $12,103 

per year per resident. 

If all States that did not cap allowable costs in 1991 had implemented caps at 

the same time intervals as those with caps, then the Medicaid savings, Federal 

and State shares combined. in 1991 would have been $683 million (56,415 

residents x $12,103 per resident). 

FEDERAL PER CAPITA LIMIT


1. 

2. 

3. 

4. 

From our sample, we listed lhe average annual reimbursement per resident in 

large State-run ICF/MRs in 1W 1 for each of the 22 sampled States. 

We selected the overall average annual rate of reimbursement for all large 

ICF/MRs, $61,000, as the per capita limit. HCFA may select other ways of 

determining a per capita IImlt. 

We subtracted the per caplI;I Ilmlt from each State’s 1991 average annual 

reimbursement for large St:ltc-run [CF/MRs to determine the amount each 

State exceeded the liml~. Stiltes with average per capita reimbursement below 

the limit would not hale been subject to the limit; therefore, they were not 

included in this calculation. 

We then multiplied the amount each State exceeded the limit by the number of 

ICF/MR residents in the State :~nd determined the savings would have been 

$565 million in 1991. 

D-1 
APPENDIX E 

AGENCY COMMENTS 

E-1 
m3 5B93


TO:	 Bryan B. Mitchell


Principal Deputy Inspector General


FROM: Acting Assistant Secretary for Planning and Evaluation 

SUBJECT :	 OIG Draft Report: “Medicaid Payments to Institutions


for Mentally Retarded People,” OEI-O4-91-O1O1O --


CONCUR WITE COMKENTS


I am pleased to have the opportunity to comment on your recently


completed study “Medicaid Pa~ents to Institutions for Mentally


Retarded People.” Your staff has worked closely with ASPE in the


design of this study and I hope that we will be able to continue


such collaborative efforts in the future.


I would also like to commend your staff for taking on such a


methodologically complex task. The findings are very important


and we appreciate their good work.


, COMMENTS 

Primarv Comment


In our original discussions with your staff, we proposed that you


analyze the extent and causes of variations in the costs of large


ICFs/MR and compare them to the costs of serving people with


mental retardation in community-based residential settings funded


under the Medicaid waiver program. Because the focus of the


actual study was limited to large ICFs/MR, the policy implica­


tions tend to focus on strategies for limiting the cost of these


types of facilities. Yet, as you point out in the report, large 

state institutions are becoming anachronistic as a way of 

providing services to people with mental retardation and there is


widespread agreement that small community-based residential


arrangements are superior settings for virtually everyone


regardless of their level of disability.


In addition, recommending that HCFA take action to reduce ICF/MR 

spending could appear to some readers of the report as an 

unfounded attempt to reduce spending on behalf of a population


that receives a relatively small percentage of total Medicaid


spending. That is, while ICF/MR per capita expenditures are 

high, and while ICF/MR costs are several times higher than 

community MR/DD Medicaid costs, spending on behalf of other 
Page 2 - Bryan B. Mitchell 

populations far exceeds MR/DD spending. I do not believe the


intent of this report was to reduce total federal spending on


behalf of people with mental retardation. -.


I think the repoti would be strengthened if it straightforwardly


acknowledged right up front some of these issues and dilemmas.


For example, it should point out that there is widespread


agreement in the MR/DD field that people with mental retardation


are better off in community settings rather than in institutions.


It should also point out that in spite of some steps such as the


waiver program and the new Community Supported Living


Arrangements program in Medicaid, Medicaid expenditures go


overwhelmingly to support large scale institutions. It should


also acknowledge that the scope of this report had to be limited


to a study of institutions although it would have been desirable


to do the comparisons with community settings originally


contemplated. Finally the report should state that although the


findings of the study largely focus on short term ways to control


reimbursement to large institutions, comprehensive reform of 

federal MR/DD policy is required to align it with what we know 

dbout the best way to provide services to people with mental 

retardation. The report should also acknowledge the fact that 

the evolution of ICF/MR policy has resulted in some perverse 

incentives for state offi.ci.als to over-rely on ICF/MR 

reimbursements in order to buy flexibility on the community side 

of the equation. 

Other Comments


1.	 It would be useful to include statistics comparing the 

proportion of total Medicaid dollars spent on large ICFs/MR 

and on community residential settings. Such comparisons 

could be drawn using the work of Charlie Lakj.n and Dave 

Braddock. The report should also compare the number of 

people residing in large ICFs/MR with the number of persons 

receiving community based MR/DD services. 

2.	 “People First” language should be used throughout the 

report, consistent with efforts by Congress and the 

“Administration to use such language. In particular, the


report should refer to “people with mental retardation’t


rather than “the mentally retarded,~~or “mentally retarded


people.tt


3.	 In explaining ‘!Whois Served in ICF/MRs” in the 

Introduction, the authors use definition of “developmental 

disability” contained in the Developmental Disabilities and 

Bill of Rights Act. Since Title XIX defines ICF/MR


eligibility in terms of people with ~’mentalretardation and


related conditions,” and Medicaid guidelines define that


phrase, it would be more clear to explain “who is served in


ICF/MRs” in terms of ICF/MR eligibility guidelines.

Page 3 - B~~a~ B. Mitchell 

4.	 In the section on “Trends,” it is confusing to say that


federal program policy encourages treatment in community


settings. It is much more accurate to say that the federal


DD Act goals for people with mental retardation which


promote productivity, independence and community integration


are in conflict with federal financing policy under the


Medicaid pro~am which continues to be biased in favor of


institutional care (as you explain when you talk about


limits on the munber of people served under the HCB


waivers) .


5.	 In the section on “Methodology,” it is not clear whether you 

interviewed staff of State MR/DD agencies, developmental 

disability councils or both. 

6.	 Regarding l~Qualityand Level of Service,” the point should


be made that compliance with the ICF/MR standards ensures


only a minimal level of quality. It is very difficult to


measure quality of life and service outcomes, even in the


relatively controlled environment of an institution.


If you have questions or concerns, please contact Mary Harahan,


Acting Deputy Assistant Secretary for Family, Community and Long-


Term Care Policy at 690-6443.


cc:	 William Toby, Jr.


Acting Administrator


Health Care Financing Administration


Elizabeth M. James


Acting Assistant Secretary for


Management and Budget

--

. 

_-.wr, ,, Health Care ~, *** ,. ,’ � DEPART,MENTOFHEALTH & HUMAN sERVsCES Financing Admlnistratmn . 

: 

:

-.

% Jg . —.. . 

‘+%<V%,. > Memorandu=

Date 

,/ 

r \ 

“ 

~R~b 1993 

~-iHiam Toby~ r. 

6&k

From Acting Administrator 

Sub)ect Office of Inspector General(OIG)DraftReport:“MedicaidPaymentsfor


Institutions forMentally Retarded
People”C)EI-O4-9I-O1O1O


To	 BryanB.Mitchell 

principal DeputyXnspector
 General

We havereviewed theabove-referenced draft report whichattempts to


determine theextent andcauses ofvariation among States inpx resident Medicaid

reimbursement rates forlarge intermediate carefacilities
 forthementally retarded

(lCF~R). 

OIG found that Medicaid reimbursement rates for large ICFS/MR are more 

than five times greater in some States than in others. State polici* rather than 

quality ofservice, facility characteristi~ or‘resident demographics, account
for


variation inICF/MR Medicaid reimbursement rates amongStates. As a result
 of


thefinding% OIG recommendsthat theHealthCareFinancing
 Administration


(HCFA) takeaction to reduce excessive spending of Medicaid funds for ICFs/MR. 

We must nonconcur with the recommendation. Medicaid’s statutory provisions 

allow States to establish their own payment systems. This flexibility allows for the 

variation among States in their payment rate% meth~ and standards used in 

determining these rates. 

States are free, within two mnstrati~ to establish their methods and standards 

fordetermining ICF/MR ratesThe rninimurn limitisthattheratepaidmust be, as 

required by section WOE of the ~ial Security Am reasonable and 

adequate to meet the costs incumed by efficiently and economically operated 

facilities. The maximum limit is that aggregate payments may not exceed the 

amount that would have been paid using the Medicare principles of reimbursement. 

The State must provide an assurance to the Secretary that its rates are consistent 

with the upper limit requirements at 42 CFR 447.272. ‘I’heregulation also requires 

States to provide this assurance for State-operated facilities 
Page 2 =Principal Deputy Inspector General 

‘Xlerefore, the statute and implementing regulations thatgovernMedicaid 

payments toICFs/MR, allow HCFA little discretion in imposing additional 

administrative controls to curb ICF/MR payments. Legislative action would be 

necessary to implement the mandato~ cost controls contained in the 

recommendation. Furthermore, any new legislation should be considered within the 

national health care reform framework being developed by the new administration. 

Thank you for the opportunity to review and comment on this draft report. 

Please advise us if you agree with our position on the report’s recommendation at 

your earliest convenience. . 

, 
:es 
oFFK35 OFIIW3PECrOR
 GENEW


The mission oftheOffice ofXnspector General (OIG), asmandated byPublic Law95-452,as


amended,is toprotect theintegrity oftheDepartment ofHealth andHuman Services’
 (HHS)


programs aswell asthehealth andwelfare ofbeneficiaries served bythose programs.
 This


statutoxy missionis carried outthrough anationwide network ofaudits, investigations,
 and


inspections conducted bythree OIG operating components: theOffice ofAudit
*ME% the


Office ofInvestigations, andtheoffice ofEduationandhmpections. TheOIG also
informs


theSecretary ofHHS ofprogram, andmanagement problems, andrecommends courses
 to


correct
 them.


OFFICE OF AUDIT SERVICES 

The OIGS 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 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 INSPE~ONS 

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 recommendation 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 Atlanta regional office under the direction of Jesse J. Flowe~, 

Regional Inspector General and Christopher Koehler, Deputy Regional Inspector General. 

Project staffi 

REGION 

RuthReiser, Project
 Leader


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