United States Government Accountability Office

GAO Testimony 

Before the Committee on Finance, 

U.S. Senate

MEDICAID

States’ Efforts to Maximize 

Federal Reimbursements 

Highlight Need for

Improved Federal Oversight

Statement of Kathryn G. Allen 

Director, Health Care

For Release on Delivery 

Expected at 10:00 a.m. EDT 

Tuesday, June 28, 2005 

 

GAO-05-836T
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

June 28, 2005

MEDICAID

States’ Efforts to Maximize Federal 

Reimbursements Highlight Need for

Improved Federal Oversight

Highlights of GAO-05-836T, a testimony

before the Committee on Finance, U.S.

Senate 

Medicaid—the federal-state health

care financing program covering 

almost 54 million low-income

people at a cost of $276 billion in 

fiscal year 2003—is by its size and

structure at significant risk of

waste and exploitation. Because of

challenges inherent in overseeing

the program, which is administered

federally by the Centers for 

Medicare & Medicaid Services 

(CMS), GAO added Medicaid to its 

list of high-risk federal programs in 

2003. Over the years, states have 

found various ways to maximize

federal Medicaid reimbursements, 

sometimes using consultants paid a

contingency fee to help them do so. 

From earlier work and a report

issued today (GAO-05-748), GAO’s 

testimony addresses (1) how some

states have inappropriately

increased federal reimbursements; 

(2) some ways states have

increased federal reimbursements 

for school-based Medicaid services

and administrative costs; and 

(3) how states are using 

contingency-fee consultants to

maximize federal Medicaid 

reimbursements and how CMS is 

overseeing states’ efforts. 

What GAO Recommends

GAO recommends that CMS

improve oversight of contingencyfee projects and states’

reimbursement-maximizing

methods. Although CMS believes 

its recent initiatives substantially

respond to the recommendations, 

GAO maintains that additional

actions are needed. 

For many years, GAO has reported on varied financing schemes and 

questionable methods used by states to increase the federal reimbursements

they receive for operating their state Medicaid programs. These schemes and 

methods can undermine Medicaid’s federal-state partnership and threaten its 

fiscal integrity. For example: 

• Some states make large supplemental payments to government-owned or

government-operated entities for delivery of Medicaid services while 

requiring these entities to return the payments to the state. This process 

creates the illusion of valid expenditures in order to obtain federal

reimbursement, effectively shifting a portion of the state’s share of 

program expenditures to the federal government and increasing the 

federal share beyond that established by formula under law.

• Medicaid funding is available for local school districts for certain health 

services for eligible children and for administrative costs. To claim 

increased federal Medicaid reimbursement, however, some states and 

school districts have used methods lacking sufficient controls to ensure 

that claims were legitimate. GAO also found funding arrangements 

among schools, states, and private consulting firms where some states

retained up to 85 percent of reimbursements for administrative costs. In

some cases, school districts paid contingency fees to consultants. 

A growing number of states are using consultants on a contingency-fee basis 

to maximize federal Medicaid reimbursements. As of 2004, 34 states—up 

from 10 states in 2002—used contingency-fee consultants for this purpose. 

GAO identified claims in each of five categories of claims (see table) from 

contingency-fee projects that appeared to be inconsistent with current CMS 

policy, inconsistent with federal law, or that undermined the fiscal integrity 

of the Medicaid program. Problematic projects often were in categories 

where federal requirements were inconsistently applied, evolving, or not 

specific. CMS has taken steps to improve its fiscal management of Medicaid, 

but a lack of oversight and clear guidance from CMS has allowed states to 

develop new financing methods or continue existing ones that take 

advantage of ambiguity and generate considerable additional federal costs. 

Five Categories of Medicaid Claims Reviewed by GAO 

Category of claims Service 

Supplemental payment

arrangements

Payments to a class of health care providers, such as nursing homes,

up to a predefined limit

School-based services Medicaid-covered medical services provided by schools, such as 

diagnostic screening or physical therapy, or the administrative cost of

providing these services

Targeted case

management services

Services to help a defined group of beneficiaries gain access to

needed medical, social, educational, and other services

Rehabilitation services Services to reduce a mental or physical disability and restore an 

individual to the best possible functional level 

Administrative costs Costs the states incur in administering their Medicaid programs

Source: GAO based on CMS information.

www.gao.gov/cgi-bin/getrpt?GAO-05-836T.

To view the full product, including the scope 

and methodology, click on the link above.

For more information, contact Kathryn G. 

Allen at (202) 512-7118.
Mr. Chairman and Members of the Committee: 

I am pleased to be here today as you explore issues relating to states’

efforts to maximize federal Medicaid reimbursements and how they can 

affect the Medicaid program. Medicaid—the federal-state program

financing health care for certain low-income children, families, and 

individuals who are aged or disabled—covered nearly 54 million people at 

an estimated total cost of $276 billion in federal fiscal year 2003. Medicaid 

is the third-largest mandatory spending program in the federal budget and 

one of the largest components of state budgets, second only to education. 

The program fulfills a crucial national role by providing health coverage 

for a variety of vulnerable populations. Congress has structured Medicaid 

as a shared financial responsibility of the federal government and the 

states, with the federal share of each state’s Medicaid payments 

determined by a formula specified by law.

1

 The Centers for Medicare & 

Medicaid Services (CMS), within the Department of Health and Human 

Services (HHS), is the federal agency responsible for the program, and the 

states design and administer their programs with considerable discretion 

and flexibility within broad federal guidelines. We have previously 

reported that the challenges inherent in overseeing a program of

Medicaid’s size, growth, and diversity put the program at high risk for 

waste, abuse, and exploitation. In 2003, we added Medicaid to our list of

high-risk federal programs.2

States can design and administer their Medicaid programs in a manner that

helps them ensure that they receive the maximum allowable federal share 

of expenditures they incur for covered services provided to eligible 

beneficiaries under a CMS-approved state Medicaid plan, as long as they 

do so within the framework of federal law, regulation, and CMS policy. To 

that end, states can employ consultants to assist them in performing a 

number of valid Medicaid-related functions that may help them to identify

and implement ways to obtain additional federal funds or that may help

save money for both the federal government and states. Consultants, for

example, can help identify claims that are inappropriately paid or that are 

 1

By a formula established in law, the federal government matches from 50 to 83 percent of

each state’s reported Medicaid expenditures for medical assistance. States with lower per

capita incomes receive higher federal matching rates. The federal government also matches

states’ costs for administering the Medicaid program, generally at 50 percent.

2

GAO, Major Management Challenges and Program Risks, Department of Health and 

Human Services, GAO-03-101 (Washington, D.C.: January 2003).

Page 1 GAO-05-836T
subject to recovery from other payers.3

 States may choose to pay 

consultants on a contingency-fee basis (that is, a percent of the additional 

federal reimbursements they generate for the state) to develop various 

types of reimbursement-maximizing projects.

4

 In the current environment

of steadily rising Medicaid costs straining federal and state budgets, states’

use of contingency-fee consultants to maximize federal reimbursement

can be problematic if controls are inadequate to ensure that additional 

federal reimbursements are allowable Medicaid expenditures. We have

earlier reported on (1) certain types of financing schemes that involved 

some states making illusory payments to government-owned or

government-operated entities such as nursing homes or hospitals, often 

through a mechanism known as intergovernmental transfers (IGTs),

5

 to

obtain increased federal reimbursements and (2) concerns with practices 

used by states and school districts to boost federal payments for schoolbased services.6

 As part of our body of work on Medicaid financing issues, 

today we are releasing a report, undertaken at the Chairman’s request, that

addresses states’ use of contingency-fee consultants to maximize federal 

Medicaid reimbursements.7

For today’s hearing, you asked us to address issues we have identified in

our past and current work concerning some reimbursement-maximizing 

strategies used by some states and CMS’s oversight of them. In my 

testimony, I will describe: (1) how, over the years, some states have 

 

i

i i l

3

Consultants can provide a wide range of services to states for their Medicaid programs. 

States that lack sufficient in-house resources can turn to consultants to add staff or needed

expertise. Contingency-fee consultants are particularly attractive to budget-constrained

states because the states do not need to pay them up front. Consultants can help states by

performing services such as identifying new methods or projects to maximize federal 

Medicaid reimbursements, training state and local staff in procedures for documenting and

submitting claims, and preparing state claims for federal Medicaid reimbursement. 

4

Contingency fees generally cannot be claimed for federal Medicaid reimbursement, unless

a contingency-fee contract (1) results in cost-avoidance savings or recoveries in which the 

federal government would share, (2) is competitively procured, and (3) the savings upon

which the contingency-fee payment is based are adequately defined and the payments

documented to CMS’s satisfaction. 

5

Intergovernmental transfers are a tool that state and local governments use to carry out

their shared governmental functions, such as collecting and redistributing revenues to

provide essential government services. 

6

See related GAO products at the end of this statement. 

7

GAO, Medicaid Financing: States’ Use of Contingency-Fee Consultants to Maxim ze

Federal Re mbursements Highl ghts Need for Improved Federa Oversight, GAO-05-748 

(Washington, D.C.: June 28, 2005). 

Page 2 GAO-05-836T
inappropriately increased federal reimbursements, sometimes using IGTs, 

through varied state financing schemes; (2) how states have used 

questionable methods to increase federal reimbursements for schoolbased Medicaid services and administrative costs and the status of CMS’s 

actions to improve oversight in this area; and (3) how states are using 

contingency-fee consultants to maximize federal Medicaid 

reimbursements and how CMS oversees states’ reimbursementmaximizing strategies. My testimony is based on several previous reports 

and testimonies, including the report we are issuing today, assessing

states’ Medicaid financing methods and federal oversight of them. The 

work that produced these reports and testimonies was conducted from

June 1993 through June 2005 in accordance with generally accepted

government auditing standards. 

In summary, for many years we have reported on the varied financing 

schemes and questionable methods that states have used to increase the 

federal reimbursements they receive for operating their state Medicaid 

programs. In our view, these methods can undermine the Medicaid

federal-state partnership and threaten the fiscal integrity of the program.

We previously reported that: 

• Some states have used IGTs to make large supplemental payments to 

government-owned or government-operated providers, which have greatly 

exceeded the established Medicaid payment rates. Such supplemental

payments create the illusion of valid expenditures for services delivered to 

Medicaid beneficiaries and allow states to obtain the federal

reimbursement, only to have the local government providers, under 

agreements with the states, transfer the excessive federal and state 

payments back to the state. As a result, some states are able to shift a 

portion of their share of program expenditures to the federal government, 

essentially increasing the federal matching rate beyond that established 

under federal law.

• Some states and school districts have used questionable methods to

increase federal Medicaid reimbursement for Medicaid health services and 

administrative costs, that is, methods that lacked sufficient controls to 

ensure that the claims were legitimate. Medicaid funding is available for 

certain health services provided by local school districts, such as

diagnostic screening and physical therapy for eligible children, including 

those with disabilities. Medicaid reimbursement is also available for the 

administrative costs of providing school-based Medicaid services. We

found funding arrangements in some states among schools, states, and 

private consulting firms that resulted in schools’ receiving a small portion 

Page 3 GAO-05-836T
of the Medicaid reimbursements, while some states retained up to 

85 percent of Medicaid reimbursements for school-based health services 

or administrative claims. Moreover, some school districts paid

contingency fees to the private consultants who assisted them in preparing 

and submitting Medicaid claims, further reducing the net amount the 

schools received. 

As we are reporting today, a growing number of states are using 

consultants on a contingency-fee basis to maximize federal Medicaid

reimbursements. As of 2004, 34 states—up from 10 states in 2002—used 

contingency-fee consultants for this purpose. We identified some claims 

from contingency-fee projects that appear to be inconsistent with current 

CMS policy and some that were inconsistent with federal law; we also 

found claims that undermined the fiscal integrity of the Medicaid program.

In Georgia and Massachusetts, where we focused our review of specific

projects, selected projects that involved the assistance of contingency-fee

consultants generated a significant amount of additional federal

reimbursements for the states: from fiscal year 2000 through 2004, an 

estimated $1.5 billion for Georgia and nearly $570 million for 

Massachusetts. For those additional reimbursements, Georgia paid its 

consultant about $82 million in contingency fees, and Massachusetts paid

its consultants about $11 million in contingency fees. Just to be clear: any 

state’s use of consultants—including contingency-fee consultants—or any 

associated growth in federal reimbursements, is not problematic, in and of

itself. However, we identified concerns in each of the five categories of

claims where we reviewed the states’ contingency-fee projects: 

supplemental payment arrangements, school-based services, targeted case 

management, rehabilitation services, and administrative costs, in either

Georgia, Massachusetts, or both states. We found that problematic

projects often tended to be in areas of Medicaid claims where federal

requirements were inconsistently applied, evolving, or not specific. The 

lack of clear CMS guidance has allowed states to develop new financing 

arrangements, or to continue existing ones, that take advantage of 

ambiguity and result in considerable additional costs to the federal 

government. 

We believe that the continuing problems we have reported in several highrisk categories of Medicaid claims illustrate not only the need to improve

oversight of claims stemming from contingency-fee projects, but also the 

urgent need for CMS to address certain issues in its overall financial

management and oversight of Medicaid. In our report issued today, we are 

reiterating certain recommendations we have previously made to Congress

and to the Administrator of CMS that remain open, as well as new ones to

Page 4 GAO-05-836T
the Administrator to improve the financial management and oversight, and

fiscal integrity, of the Medicaid program. 

In commenting on a draft of the report issued today, CMS stated that it has 

already substantially met our recommendations. While acknowledging that

improper Medicaid payments had unquestionably occurred, the agency 

provided detailed information to support why it believes that it (1) was

already aware of the concerns identified in projects we examined and 

(2) has taken sufficient action to address these concerns and our related 

GAO recommendations. In our view, however, CMS has not sufficiently

identified or addressed the concerns that we identified, and we believe 

CMS needs to do more to identify problematic claims resulting from

contingency-fee projects sooner, before large reimbursements have been 

made to states. We continue to believe that CMS needs to do more to

clarify, communicate, and consistently apply its policies concerning 

certain high-risk areas of the Medicaid program. 

Title XIX of the Social Security Act8

 authorizes federal funding to states for 

Medicaid, which finances health care for certain low-income children, 

families, and individuals who are aged or disabled. Although states have 

considerable flexibility in designing and operating their Medicaid 

programs, they must comply with federal requirements specified in 

Medicaid statute and regulation. For example, states must provide 

methods to ensure that payments for services are consistent with 

economy, efficiency, and quality of care.9

 Medicaid is an entitlement 

program: states are generally obligated to pay for covered services 

provided to eligible individuals, and the federal government is obligated to

pay its share of a state’s expenditures under a CMS-approved state 

Medicaid plan. 

Our prior and current work addresses five categories of Medicaid claims 

where we are aware that states have reimbursement-maximizing

strategies. Our current work in particular concentrated on these five 

categories because—on the basis of factors such as nationwide growth in

dollars claimed, the results of our past reviews, and work by HHS’s Office 

of Inspector General (OIG) to assess the appropriateness of claims in

these categories—we judged them to be of particularly high risk. Over the 

Background 

 8

42 U.S.C. §§ 1396, et seq. (2000). 

9

42 U.S.C. § 1396a(a)(30) (2000). 

Page 5 GAO-05-836T
past few years, states’ claims in some of these categories have grown

significantly in dollar amounts. The five categories of claims we examined,

and recent trends in claimed expenditures, are described in table 1. 

Table 1: Five Categories of Medicaid Claims Reviewed by GAO Where States Are Maximizing Federal Medicaid

Reimbursements and Trends in Reported Expenditures 

Category of Medicaid claims Trends in reported expenditures 

Supplemental payment arrangements: A common supplemental payment arrangement

is known as the upper payment limit, or UPL, arrangement. UPL is the upper bound on 

what the federal government will pay as its share of Medicaid costs; it is the federal 

government’s way of placing a ceiling on federal financial participation in a state’s 

Medicaid program. UPLs are tied to the methodology that Medicare, the federal health 

care program that covers seniors aged 65 and older and some disabled persons, uses to

pay for comparable services. The rates that states pay their Medicaid service providers 

are often lower than the federal Medicare rates to which Medicaid UPL rates are tied. 

Thus, a gap often exists between the amount states actually spend to provide services to 

Medicaid beneficiaries and the Medicare-based UPLs. States can obtain additional 

federal funding for the amount under the UPL ceiling by making supplemental payments 

to a class of providers, such as nursing homes or hospitals. 

Federal and state UPL expenditures 

through all UPL arrangements grew from

an estimated $10.3 billion in 28 states in 

fiscal year 2000 to $11.2 billion in 45 

states in fiscal year 2004. During this time

period, Congress and CMS acted to limit 

excessive UPL arrangements and 

associated claims.a

School-based services: Schools can help identify Medicaid-eligible low-income children, 

facilitate their enrollment in Medicaid, and provide them certain Medicaid-covered 

services. When Medicaid-eligible children receive Medicaid services—such as diagnostic

screening or physical therapy—through the school system, states can use their Medicaid

programs to pay for these services. School districts may also receive Medicaid 

reimbursement for the administrative costs of providing school-based Medicaid services. 

For fiscal years 2002 through 2003, 

combined federal and state spending on

school-based services grew 8 percent 

nationwide, from $1.97 billion to 

$2.13 billion. Nationwide, more than 

$900 million (federal and state) went 

toward school-based administrative costs 

in both fiscal years 2002 and 2003. 

Targeted case management services (TCM): Case management helps beneficiaries 

gain access to needed medical, social, educational, and other services and coordinates

beneficiaries’ use of providers. TCM enables states to provide case management

services to a defined group or groups of Medicaid-eligible individuals without providing 

the same service to all Medicaid beneficiaries statewide, as normally required by 

Medicaid law. Current CMS policy does not allow federal Medicaid reimbursement for 

TCM services provided by the state if those services are “an integral component” of an 

existing state program.

b

For fiscal years 1999 through 2003, 

combined federal and state spending for

Medicaid TCM services increased by 

76 percent, from $1.7 billion to $3 billion. 

Rehabilitation services: Rehabilitation services are intended for the maximum reduction 

of a physical or mental disability and to restore an individual to the best possible 

functional level. Covered services may include occupational and physical therapy, mental 

health services, and treatment for addiction. The benefit is optional, that is, state 

Medicaid programs are not required to cover the service but may do so at their own

option. 

Because rehabilitation services are not 

reported separately in CMS expenditure 

reports, the trend in expenditures for these 

services is unknown. 

Administrative costs: The federal government reimburses states, generally at 

50 percent, for their costs of administering their Medicaid programs. To determine which 

administrative costs the state can attribute to Medicaid, states submit a cost allocation 

plan for HHS approval.c

 This plan establishes the methods the state will use to distribute 

its administrative costs—such as employee time and costs related to providing services

to both Medicaid-eligible and non-Medicaid-eligible individuals—across different funding 

sources.

For fiscal years 1999 through 2003, 

combined federal and state spending for

the states’ Medicaid administrative costs 

grew 37 percent, from $9.5 billion to 

$13.0 billion.d

Source: GAO. 

Page 6 GAO-05-836T
a

For example, the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 

directed CMS to issue a final regulation to limit states’ ability to claim excessive federal 

reimbursements through UPL supplemental payments.

b

CMS recently reiterated this policy in a 2004 Administrator’s decision that denied approval of a state 

plan amendment requested by Maryland to provide TCM services to children in the state’s foster care 

program. See CMS, Disapproval of Maryland State Plan Amendment No. 02-05, Docket No. 2003-02 

(Aug. 27, 2004). The Administrator’s decision was based in part on a statement in the legislative

history accompanying the legislation authorizing coverage for TCM services that payment for TCM

services must not duplicate payments to public agencies or private entities under other program

authorities. See H.R. Rep. No. 99-453, at 546 (1985). We did not evaluate the legal basis for CMS’s

policy as part of this review.

c

Unlike CMS’s direct review and approval role for states’ Medicaid plan amendments, CMS has an

advisory review role for the plans that state Medicaid agencies prepare for allocating their

administrative overhead costs; at the national level, HHS’s Division of Cost Allocation instead takes

the lead in reviewing these cost allocation plans. The division generally distributes copies of cost

allocation plan sections to affected federal agencies, including CMS, for comment.

d

These figures include costs associated with school-based administration.

For many years, states have used varied financing schemes, sometimes 

involving IGTs, to inappropriately increase federal Medicaid

reimbursements. Some states, for example, have made large Medicaid 

payments to certain providers, such as nursing homes operated by local

governments, which have greatly exceeded the established Medicaid 

payment rate. These transactions create the illusion of valid expenditures

for services delivered by local-government providers to Medicaid-eligible 

individuals and enable states to claim large federal reimbursements. In 

reality, the spending is often only temporary because states require the 

local governments to return all or most of the money to the states through 

IGTs. Once states receive the returned funds, they can use them to

supplant the states’ own share of future Medicaid spending or even for 

non-Medicaid purposes. 

States Have Used

Intergovernmental 

Transfers to Facilitate 

Financing Schemes 

That Inappropriately 

Increase Federal 

Medicaid 

Reimbursements 

As various schemes involving IGTs have come to light, Congress and CMS 

have taken actions to curtail them, but as one approach has been

restricted, others have often emerged. Table 2 describes some of the 

states’ financing schemes over the years and how Congress and CMS have 

responded to them. 

Page 7 GAO-05-836T
Table 2: Medicaid Financing Schemes Used to Inappropriately Generate Federal Reimbursements and Federal Actions to 

Address Them 

Financing arrangement Description Action taken 

Excessive payments to state 

health facilities 

States made excessive Medicaid payments to

state-owned health facilities, which subsequently

returned these funds to the state treasuries. 

In 1987, the Health Care Financing 

Administration (HCFA) issued regulations that 

established payment limits specifically for 

inpatient and institutional facilities operated by 

states.

Provider taxes and donations Revenues from provider-specific taxes on

hospitals and other providers and from provider 

“donations” were matched with federal funds and 

paid to the providers. These providers could then 

return most of the federal payment to the states. 

The Medicaid Voluntary Contribution and 

Provider-Specific Tax Amendments of 1991 

essentially barred certain provider donations, 

placed a series of restrictions on provider taxes,

and set other restrictions for state contributions.

Excessive disproportionate share 

hospital (DSH) payments 

DSH payments are meant to compensate those 

hospitals that care for a disproportionate number 

of low-income patients. Unusually large DSH

payments were made to certain hospitals, which 

then returned the bulk of the state and federal

funds to the state. 

The Omnibus Budget Reconciliation Act of 

1993 placed limits on which hospitals could 

receive DSH payments and capped both the 

amount of DSH payments states could make

and the amount individual hospitals could 

receive. 

Excessive DSH payments to 

state mental hospitals 

A large share of DSH payments were paid to 

state-operated psychiatric hospitals, where they

were used to pay for services not covered by 

Medicaid or were returned to the state treasuries.

The Balanced Budget Act of 1997 limited the 

proportion of a state’s DSH payments that can 

be paid to state psychiatric hospitals. 

Upper payment limit (UPL) for 

local-government health facilities 

Federal regulations prohibit Medicaid from paying

more than a reasonable estimate of the amount 

that would be paid under Medicare payment

principles for comparable services. This UPL 

applies to payments aggregated across a class of

facilities and not for individual facilities. As a

result of the aggregate upper limit, states were 

able to make large supplemental payments to a 

few local public health facilities, such as hospitals 

and nursing homes. The local-government health 

facilities then returned the bulk of the state and 

federal payments to the states. 

The Medicare, Medicaid, and SCHIP Benefits 

Improvement and Protection Act of 2000 

required HCFA to issue a final regulation that 

established a separate payment limit for each

of several classes of local-government health 

facilities. In 2002, CMS issued a regulation that 

further lowered the payment limit for local public

hospitals. 

Source: GAO, Medicaid: Intergovernmental Transfers Have Facilitated State Financing Schemes, GAO-04-574T (Washington, D.C.: 

Mar. 18, 2004). Before June 2001, CMS was known as the Health Care Financing Administration (HCFA). 

A leading variant of these illusory financing arrangements today involves

states’ taking advantage of Medicaid’s upper payment limit (UPL) 

provisions. Although states are allowed, under law and CMS policy, to

claim federal reimbursements for supplemental payments they make to

providers up to the UPL ceilings, we have reported earlier that payments

in excess of the provider’s costs that are not retained by the provider as

reimbursement for services actually provided are inconsistent with 

Page 8 GAO-05-836T
Medicaid’s federal-state partnership and fiscal integrity.10 For example, we

have reported that by paying nursing homes and hospitals owned by local 

governments much more than the established Medicaid payment rate and 

requiring the providers to return, through IGTs, the excess state and 

federal payments to the state, states obtain excessive federal Medicaid 

reimbursements while their own state expenditures remain unchanged or

even decrease.11 Such round-trip payment arrangements can be 

accomplished via electronic wire transfer in less than an hour. States have 

then used the returned funds to pay their own share of future Medicaid

spending or to fund non-Medicaid programs. 

Problems with excessive supplemental payment arrangements remain,

despite congressional and CMS action to curtail financing schemes. For

example, in our current review of states’ use of contingency-fee 

consultants, we found an example in Georgia that illustrates how current

law and policy continue to allow states to generate excessive federal 

reimbursements beyond established Medicaid provider payments for 

covered services. Georgia and its consultant developed five UPL 

arrangements using IGTs—one each for local-government-operated 

inpatient hospitals, outpatient hospitals, nursing homes and for stateowned hospitals and nursing homes. Over the 3-year period of state fiscal

years 2001 through 2003, the state made supplemental payments totaling 

$2.0 billion to nursing homes and hospitals operated by local governments 

(see fig. 1). A sizable share of the $2.0 billion payments was illusory, 

however. In reality, the nursing homes and hospitals netted only $357 

million because they had initially transferred $1.7 billion to the state 

Medicaid agency, through IGTs, under an agreement with that agency. The

state combined this $1.7 billion with $1.2 billion in federal funds, which

represented the estimated federal share of its supplemental payments to

local-government facilities of $2.0 billion. The state thus had a funding 

pool of $2.9 billion at its disposal. From this pool, the state made the 

$2.0 billion in supplemental payments to local-government providers and 

retained $844 million to offset its other Medicaid expenditures. 

 i

i

10See, for example, GAO-04-574T and Medicaid: Improved Federal Overs ght of State

Financ ng Schemes Is Needed, GAO-04-228 (Washington, D.C.: Feb. 13, 2004). 

11In another approach, some states require a few counties to initiate the transaction by

taking out bank loans for the total amount the states determined they can pay under the

UPL. The counties wire the funds to the states, which then send most or all of the funds

back to the counties as Medicaid payments. The counties use these “Medicaid payments” to 

repay the bank loans. Meanwhile, the states claim federal matching funds on the total

amount. 

Page 9 GAO-05-836T
Figure 1: Georgia’s UPL Arrangement with Local-Government Health Care Providers, State Fiscal Years 2001–2003 

State Medicaid 

agency

$2.9 billion

CMS

✖

Local-government 

facilities

Local-government 

facilities net $357 million

Source: GAO.

Transaction 3: State pays $2.0 billion to localgovernment facilities

$1.7 billion

$2.0 billion

$1.2 billion

Transaction 1: Local-government facilities 

transfer $1.7 billion to the state Medicaid agency

Transaction 2: State draws, from its federal advance, the federal 

share of its planned $2.0 billion payment to local-government 

facilities, resulting in a funding pool of $2.9 billion

State retains $844 million CMS pays $1.2 billion

Note: Totals may not add up because of rounding. See GAO-05-748. 

In our view, the inappropriate use of IGTs in schemes such as UPL 

financing arrangements violates the fiscal integrity of Medicaid’s federalstate partnership in at least three ways. 

• The schemes effectively increase the federal matching rate established 

under federal law by increasing federal expenditures while state 

contributions remain unchanged or even decrease. We previously

estimated that one state effectively increased the federal share of its total 

Medicaid expenditures from 59 percent to 68 percent in state fiscal year 

2001, by obtaining excessive federal funds and using these as the state’s 

share of other Medicaid expenditures.12

 12GAO-04-228. 

Page 10 GAO-05-836T
• There is no assurance that these increased federal reimbursements are

used for Medicaid services, since states use funds returned to them via 

these schemes at their own discretion. In examining how six states with

large schemes used the federal funds they generated, we previously found 

that one state used the funds to help finance its education programs, and 

others deposited the funds into state general funds or other special state

accounts that could be used for non-Medicaid purposes or to supplant the 

states’ share of other Medicaid expenditures.13

• The schemes enable states to pay a few public providers amounts that well

exceed the costs of services provided, which is inconsistent with the 

statutory requirement that states provide for methods that ensure that

Medicaid payments are consistent with economy and efficiency. We 

previously reported that, in one state, the state’s proposed scheme

increased the daily federal payment per Medicaid resident from $53 to 

$670 in six local-government-operated nursing homes.14

Another category of claims where states have used questionable practices 

to maximize federal reimbursements is services provided to children in

schools and associated administrative costs. Medicaid is authorized to

cover services to, for example, Medicaid-eligible children with disabilities

who may need diagnostic, preventive, and rehabilitative services; speech, 

physical and occupational therapies; and transportation. School districts 

may also receive Medicaid reimbursement for the administrative costs of 

providing school-based Medicaid services. Our work in this area has 

addressed claims for Medicaid school-based health services and 

administration. In 1999, we found a need for federal oversight of growing 

Medicaid reimbursements to states for Medicaid school-based 

administrative services, including outreach activities to enroll children in 

Medicaid.15 In April 2000, we reported that Medicaid expenditures for 

school-based health services totaled about $1.6 billion for services

provided by schools in 45 states and the District of Columbia, while 

Medicaid administrative expenditures were about $712 million for costs 

Questionable Methods 

Have Boosted Federal 

Reimbursements for 

School-Based Claims 

 13GAO-04-228. 

14GAO, Medicaid: HCFA Reversed Its Position and Approved Additional State Financing 

Schemes, GAO-02-147 (Washington, D.C.: Oct. 30, 2001).

15GAO, Medicaid: Questionable Practices Boost Federal Payments for School-Based

Services, GAO/T-HEHS-99-148 (Washington, D.C.: June 17, 1999). 

Page 11 GAO-05-836T
billed by schools in 17 states.16 We found that some of the methods used by 

school districts and states to claim reimbursement for school-based health

services did not ensure that the services paid for were provided: some 

claims, for example, were made solely on the basis of at least one day’s 

attendance in school, rather than on documentation of any actual service 

delivery. Methods used by school districts to claim Medicaid

reimbursement failed in some cases to take into account variations in

service needs among children. 

With regard to Medicaid school-based administrative costs, we found that

some methods used by school districts and states did not ensure that

administrative activities were properly identified and reimbursed. Poor 

controls resulted in improper payments in at least two states, and there 

were indications that improprieties could have been occurring in several 

other states. We further found that, in some states, funding arrangements

among schools, states, and private consulting firms created adverse 

incentives for program oversight and caused schools to receive a small 

portion—as little as $7.50 for every $100 in Medicaid claims—of Medicaid 

reimbursement for school-based administrative and service claims. We 

reported that 18 states retained a total of $324 million, or 34 percent, of

federal funds intended to reimburse schools for their Medicaid 

administrative and service claims; for 7 of the states, this amounted to 50

to 85 percent of federal Medicaid reimbursement for school-based health

services claims. In addition, contingency fees, which some school districts 

paid to private consultants for their assistance in preparing and submitting

Medicaid claims, ranged from 3 to 25 percent of the federal 

reimbursement, further reducing the net amount that schools received. 

In response to recommendations we made to the Administrator of CMS, 

CMS has clarified guidance for states on submitting claims for schoolbased administrative activities.17 Subsequent to our work, HHS OIG 

conducted reviews of school-based claims in 18 states from November 

 :

i

i i i

16GAO, Medicaid in Schools Improper Payments Demand Improvements in HCFA 

Overs ght, GAO/HEHS/OSI-00-69 (Washington, D.C.: Apr. 5, 2000). States were asked to

provide school-based claims data for the most recent fiscal year for which they were

available, which for approximately half the states was state fiscal year 1999. Most of the 

remaining states provided data for state fiscal year 1998, federal fiscal year 1998, or

calendar year 1998; three states provided data for periods before July 1997. 

17CMS, Medicaid School-Based Adm nistrative Cla m ng Guide (May 2003).

Page 12 GAO-05-836T
2001 through June 2005, several of which have identified issues with the 

appropriateness of claims related to consultants’ projects.

18

In our own most recent work, we determined that Georgia was retaining a 

share of the additional federal reimbursements gained from its claims for

Medicaid school-based services. Georgia’s contingency-fee consultant

assisted the state with its Medicaid claims for school-based services in a 

project that generated about $54 million in federal Medicaid 

reimbursements over the 3 years the consultant was paid and that, on the 

basis of state data, we estimate continues to generate about $25 million 

annually.19 As before, we found that the school districts were not receiving 

all of the federal Medicaid reimbursements that were generated on their 

behalf. According to a state official and documents provided by the state, 

the state retained $3.9 million, or 16 percent, of federal reimbursements 

that were claimed on behalf of the school districts for state fiscal year

2003, most of which was used to pay its contingency-fee consultant and 

about $1 million of which was used to cover the salaries and 

administrative costs of the five state employees who administered schoolbased claims in Georgia.20

 t i

i i i t

i - t i t

18See, for example, HHS OIG, Medicaid Payments for School-Based Heal h Serv ces—

Massachusetts Divis on of Med cal Ass s ance, A-01-02-00009 (Washington, D.C.: July 14, 

2003); and HHS OIG, Medica d School Based Health Services Adminis rat ve Cos s—

Massachusetts, A-01-02-00016 (Washington, D.C.: Sept. 15, 2004). See GAO-05-748, app. II, 

for other HHS OIG reports on school-based services and administration. 

19We did not assess whether the school-based health services that the state claimed were

allowable.

20GAO-05-748. 

Page 13 GAO-05-836T
A growing number of states are using consultants on a contingency-fee

basis to maximize federal Medicaid reimbursements. CMS reported that, 

according to a survey it conducted in 2004, 34 states had used consultants 

on a contingency-fee basis for this purpose, an increase from 10 states 

reported to have such arrangements in 2002. In the 2 states where we

examined selected projects that involved the assistance of contingency-fee 

consultants, Georgia and Massachusetts, we found that the projects

generated a significant amount of additional federal reimbursements for 

the states: from fiscal year 2000 through 2004, an estimated $1.5 billion in 

Georgia and nearly $570 million in Massachusetts. For those additional 

reimbursements, Georgia paid its consultant about $82 million in 

contingency fees, and Massachusetts paid its consultants about $11 million 

in contingency fees. We identified claims from contingency-fee consultant 

projects that appear to be inconsistent with current CMS policy and claims

that are inconsistent with federal law; we also identified claims from

projects that undermine Medicaid’s fiscal integrity. Such projects and 

resulting problematic claims arose in each of the five categories of claims 

that we reviewed in Georgia, Massachusetts, or for some categories, both

states. We observed two factors common to many projects that we believe 

increase their risk. First, many projects were in categories of Medicaid 

claims where federal requirements for the services have been 

inconsistently applied, are evolving, or were not specific. Second, many 

projects involved states’ shifting costs to the federal government through

Medicaid reimbursements to other state or local-government entities. 

For the five categories of claims we reviewed where states frequently used 

contingency-fee consultants to maximize their federal Medicaid

reimbursements, we identified problematic claims in each category in

either Georgia or Massachusetts or in both states. These projects resulted 

in claims that appear to be inconsistent with current CMS policy and that, 

for one project, were inconsistent with federal law. We also identified

claims that were inconsistent with the fiscal integrity of the Medicaid 

program. I have already discussed our current findings regarding Georgia’s 

use of IGTs in UPL supplemental payment arrangements and its project to

increase claims for school-based Medicaid services and administrative 

costs. We also reviewed Georgia’s and Massachusetts’s use of contingencyfee consultants to increase federal reimbursements for targeted case 

management services, rehabilitation services for mental or physical

disabilities, and states’ claims for administering their Medicaid programs.

In these two states, our findings were most significant in the areas of

targeted case management and rehabilitation services. 

States’ Use of

Contingency-Fee

Consultants to 

Maximize Federal 

Reimbursements 

Highlights Need for 

Improved Federal 

Oversight 

Some Contingency-Fee 

Projects in Georgia and 

Massachusetts Resulted in

Problematic Federal 

Reimbursements 

Page 14 GAO-05-836T
Georgia and Massachusetts—with the help of their contingency-fee

consultants—developed approaches to maximize federal Medicaid

reimbursements by claiming costs for targeted case management (TCM) 

services under state plan amendments that CMS had approved prior to

2002. Georgia’s consultant assisted the state in increasing federal Medicaid 

reimbursement for TCM services provided by two state agencies: the 

Department of Juvenile Justice and the Division of Family and Children’s 

Services.21 In Massachusetts, contingency-fee consultants helped the state 

increase federal reimbursement for TCM services provided by three state

agencies: the Departments of Social Services, Youth Services, and Mental 

Health. These case management services in Georgia and Massachusetts

appear integral to the states’ own programs; the states’ laws, regulations,

or policies called for case management services in these programs, and the 

case management services were provided to all Medicaid- and nonMedicaid-eligible children served by the programs.

22 More recently, CMS 

has denied coverage for comparable services by other states because CMS 

determined that the services are an integral component of the state 

programs providing the services. For example, in fiscal year 2002, CMS 

denied a state plan amendment proposal to cover TCM services in Illinois 

and in fiscal year 2004 it found TCM claims in Texas unallowable, in part

because the TCM services claimed for reimbursement were considered 

integral to other state programs. As in Georgia and Massachusetts, the

TCM services in Illinois were for children served by the state’s juvenile 

justice system. In Texas, such children were served by the state’s child 

welfare and foster care system. 

In fiscal year 2003, we estimate that Georgia received $17 million in federal

reimbursements for claims for TCM services provided by its two state

agencies, of which about $12 million was for services that appear to be 

integral to non-Medicaid programs. In fiscal year 2004, Massachusetts 

received an estimated $68 million in federal reimbursements for services

that appear to be integral to non-Medicaid programs in the three state 

Targeted Case Management 

 21The consultant assisted Georgia by streamlining the billing process, drafting state plan

amendment proposals, and increasing the number of Medicaid beneficiaries for whom

these two non-Medicaid state agencies billed case management services, thus reducing

costs to the state for operating these agencies. 

22For example, all children served by Georgia’s and Massachusetts’s child welfare agencies

receive a broad range of services to promote their welfare and protect them from abuse 

and neglect. To fulfill this responsibility, state employees provide case management

services, refer the children to others for services, and monitor their well-being and 

progress. 

Page 15 GAO-05-836T
agencies whose TCM projects were developed by consultants.23 CMS 

officials agreed with our assessment that the claims for TCM services in 

these two states were problematic. 

Our review of projects involving rehabilitation services found concerns 

with methods and claims in Georgia. Georgia’s consultant helped the state

increase federal Medicaid reimbursements for rehabilitation services

provided through two state agencies by $58 million during state fiscal 

years 2001 through 2003. The consultant suggested that state agencies—

which pay private facilities under a per diem rate for providing room and 

board, rehabilitation counseling and therapy, educational, and other 

services to children in state custody—base their claims for Medicaid 

reimbursement on the private facilities’ estimated costs, instead of on 

what the state agencies actually paid those facilities. The state agencies 

increased their claims for Medicaid reimbursement without increasing 

their payments to the facilities. In some cases, the state agencies’ Medicaid 

claims for rehabilitation services alone exceeded the amount paid by the 

agencies for all the services the facilities provided to children. Specifically, 

for 82 of the residential facilities (about 43 percent), the amount the state

Medicaid agency reimbursed the two agencies in state fiscal year 2004 

exceeded the total amount these agencies actually paid the residential 

facilities for all services, not just rehabilitation services. One facility, for 

example, was paid by the Division of Family and Children’s Services $37 

per day per eligible child for all services covered by the per diem payment, 

but the state agency billed the Medicaid program $62 per day for

rehabilitation services alone. CMS officials agreed with our conclusion 

that claims from this contingency-fee project were not in accord with the 

statutory requirement that payments be efficient and economical. 

During our work we observed two factors that appear to increase the risk 

of problematic claims. One factor involved federal requirements that were

inconsistently applied, evolving, or not specific; the second involved 

states’ claiming Medicaid reimbursement for services provided by other 

state or local-government agencies. Despite CMS’s long-standing concern 

about state financing arrangements for both TCM and supplemental

payments, for example, the agency has not issued adequate guidance to 

Rehabilitation Services

Two Factors Increase Risk 

of Problematic Claims 

 23In examining CMS expenditure reports, we found that both Georgia and Massachusetts

had categorized non-TCM services, such as rehabilitation services, as TCM. We obtained

estimates from the states of the amount the states had claimed for TCM services. 

Page 16 GAO-05-836T
clarify expenditures allowable for federal reimbursement. Federal TCM 

and supplemental payment policy for allowable claims in these categories 

has evolved over time, and the criteria that CMS applies to determine 

whether claims are allowable have been communicated to states primarily 

through state-specific state plan amendment reviews or claims 

disallowances, rather than through formal guidance or regulation. 

• Inconsistently applied policy for allowable TCM services. In 2002, 

CMS began to deny proposed state plan amendments that sought approval

for Medicaid coverage of TCM services that were the responsibility of

other state agencies. CMS had determined that such arrangements were 

not eligible for federal Medicaid reimbursement for several reasons: 

(1) the services were typically integral to existing state programs, 

(2) the services were provided to beneficiaries at no charge, and 

(3) beneficiaries’ choice of providers was improperly limited.24 However, 

CMS approved Georgia’s and Massachusetts’s state plan amendments for 

TCM services before 2002. Although CMS has been applying these criteria

to deny new TCM arrangements—for example, in Maryland, Illinois, and

Texas—it has not yet sought to address similar, previously approved TCM 

arrangements that are inconsistent with these criteria. CMS regional 

officials told us they could not reconsider the TCM claims from two 

agencies in Georgia and four in Massachusetts because they were waiting 

for new guidance that the agency was preparing.25 CMS has been working

on new TCM guidance for more than 2 years, according to agency officials. 

As of May 2005, however, this guidance had not been issued. CMS’s fiscal

year 2006 budget submission identifies savings that could be achieved by

clarifying allowable TCM services, but CMS had not published a specific

proposal at the time we completed our work.26

 24CMS most recently explained its policy and rationale in a September 2004 Administrator’s

decision denying a proposed state plan amendment from Maryland to cover TCM services. 

This decision articulated the criteria that CMS has applied to deny state TCM plan 

amendments. 

25A CMS official stated that the agency’s most recent guidance on TCM, issued in January 

2001, contained problems and errors that caused confusion regarding appropriate TCM

claims when non-Medicaid state agencies were involved. 

26The CMS Administrator’s performance budget for fiscal year 2006 proposes to clarify 

allowable TCM services and align federal reimbursement for TCM services with an

administrative matching rate of 50 percent. CMS estimates 5-year budget savings from

reducing the reimbursement for TCM to the administrative matching rate of $1 billion.

Page 17 GAO-05-836T
• Evolving policy for allowable supplemental payment arrangements. 

For several years, we and others have reported on state financing schemes 

that allow states to inappropriately generate federal Medicaid

reimbursement without the state’s paying its full share. Although Congress 

and CMS have taken steps to curb these abuses, states can still develop 

arrangements enabling them to make illusory payments to gain federal 

reimbursements for their own purposes. Recognizing that states can 

unduly gain from supplemental payment arrangements, such as UPL 

payment arrangements that use IGTs, since fiscal year 2003 CMS has 

worked with individual states to address such arrangements. At the same

time, the agency has not issued guidance stating its policy on acceptable 

approaches for UPL payment arrangements, specifically the use of IGTs

and the relationship to state share of spending. CMS’s budget for fiscal

year 2006 proposes to achieve federal Medicaid savings by curbing 

financing arrangements that have been used by a number of states to 

inappropriately obtain federal reimbursements. The specific proposal, 

however, had not been published at the time we completed our review.

27

• Unspecified policy on allowable Medicaid rehabilitation payments

to other state agencies. CMS has not issued policy guidance that

addresses situations where Medicaid payments are made by a state’s 

Medicaid agency to other state agencies for rehabilitation services. CMS 

financial management officials told us that states’ claims for rehabilitation 

services posed an increasing concern, in part because officials believed 

that states were inappropriately filing claims for services that were the 

responsibility of other state programs. CMS does not specify whether 

claims for the cost of rehabilitation services that are the responsibility of

non-Medicaid state agencies are allowable. CMS’s fiscal year 2006 budget 

submission identifies savings that could be achieved by clarifying

 

t

t

27The budget proposes to build on CMS’s efforts to curb questionable financing practices by

(1) recovering federal funds claimed for covered services but retained by the state and 

(2) capping payments to government providers at no more than the cost of furnishing

services to Medicaid beneficiaries. CMS estimated 5-year budget savings of $5.9 billion

from this proposal. CMS’s proposal is consistent with a recommendation that we first made

to Congress in 1994 to consider legislation to prohibit Medicaid payments to government

providers that exceed the providers’ actual costs. See GAO, Medicaid: Sta es Use Illusory

Approaches to Shift Program Cos s to Federal Government, GAO/HEHS-94-133

(Washington, D.C.: Aug. 1, 1994).

Page 18 GAO-05-836T
appropriate methods for claiming rehabilitation services. CMS had not

published a specific proposal at the time we completed our review.

28

The second factor we observed that increased the financial risk to the 

federal government of reimbursement-maximizing projects was that the 

projects shifted state costs to the federal government by claiming 

Medicaid reimbursement for services provided by other non-Medicaid 

state or local government agencies. Medicaid reimbursement to 

government agencies serving Medicaid beneficiaries is allowable in cases 

where the claims apply to covered services and the amounts paid are

consistent with economy and efficiency. However, the projects and 

associated claims we reviewed showed that reimbursement-maximizing 

projects often involved services and circumstances that Medicaid should 

not pay for—such as illusory payments to government providers. 

As we describe in the report issued today, the problems we identified with 

states’ Medicaid claims stemming from contingency-fee projects illustrate 

the urgent need to address certain issues in CMS’s overall financial 

management of the Medicaid program. These issues, however, are not 

limited to situations that involve contingency-fee consultants. We have 

identified problems with claims in states other than Georgia and 

Massachusetts that have undertaken reimbursement-maximizing activities, 

without employing consultants, in categories of long-standing concern,

such as supplemental payment arrangements. CMS relies on its standard 

financial management controls to identify any unallowable Medicaid 

claims that states may submit, including those that might be associated 

with reimbursement-maximizing contingency-fee projects. However, CMS 

lacks clear, consistent policies to guide the states’ and its own financial

oversight activities. Furthermore, in our previous work on CMS’s financial

management, we found that the agency did not have a strategy for 

Problems Illustrate Need 

to Improve the Financial 

Management of Medicaid 

 28The CMS Administrator’s budget for fiscal year 2006 expresses CMS’s concern that states

have attempted to shift costs associated with other social service programs to Medicaid.

The budget proposes to clarify allowable services that could be claimed as rehabilitation.

For its proposal to clarify allowable TCM and rehabilitation services that could be claimed,

CMS estimates 5-year budget savings of $2 billion. See Centers for Medicare & Medicaid

Services’ performance budget proposal for fiscal year 2006. 

Page 19 GAO-05-836T
focusing its resources most effectively on areas of high risk.29 In our 

current work, we found that CMS has known for some time that two highrisk categories we identified—claims generated from consultants paid on a

contingency-fee basis to maximize reimbursements and claims generated 

from arrangements where state Medicaid programs are paying other state 

agencies or government providers—were problematic. For example, CMS

had listed these two categories on a financial tracking sheet of high-risk 

areas as of 2000.30 At an October 2003 congressional hearing, the CMS

Administrator expressed concern that the Medicaid program was 

understaffed and that consultants in the states were “way ahead of” CMS 

in helping states take advantage of the Medicaid system.

31

CMS has undertaken important steps to improve its financial management

of the Medicaid program. A major component of the agency’s initiative is

hiring, training, and deploying approximately 100 new financial analysts, 

mainly to regional offices. These analysts are responsible for identifying 

state sources of Medicaid funding and contributing to the review of state 

budget estimates and expenditure reports. Expectations for CMS’s new

Division of Reimbursement and State Financing and for the 100 new

financial analysts are high and their responsibilities broad. It is too soon, 

however, to assess their accomplishments. 

 i i : l

:

i t itt

29See, for example, GAO, Medica d Financ al Management Better Oversight of State C aims

for Federal Reimbursement Needed, GAO-02-300 (Washington, D.C.: Feb. 28, 2002). This

February 2002 report found that CMS’s systems for financial oversight of state Medicaid

programs were limited. We recommended a range of approaches to strengthen internal 

controls and target limited resources, including that CMS revise its existing riskassessment efforts to more effectively and efficiently target oversight resources to areas

most vulnerable to improper payments. An ongoing GAO review is assessing CMS’s

progress in implementing related recommendations. Also, in a report on state financing

schemes (see GAO-04-228), we recommended that CMS improve oversight of state UPL

projects, including issuing guidance to states setting forth acceptable methods to calculate 

UPLs. These recommendations remain open. 

30In 2001, CMS asked each regional office to complete a risk assessment to identify the

extent to which states in each region have attributes warranting closer CMS financial

oversight and scrutiny. The identified risk factors that regional staff were asked to assess

included: areas where federal policy was unclear, states’ use of a contingency-fee

consultant to maximize reimbursements, and payments to public providers in which state 

Medicaid agencies may lack an incentive to monitor and control expenditures. Regional

officials were to base their assessment of these and other risk factors on their working 

knowledge of each state. 

31Thomas Scully, Administrator, Centers for Medicare & Medicaid Services, responding to 

questions at a hearing, Challenges Facing the Medicaid Program in the 21st Century

Hear ng before the Subcommittee on Heal h, House Comm ee on Energy and Commerce, 

108th Cong., 1st Sess., October 8, 2003. 

Page 20 GAO-05-836T
For more than a decade, we and others have reported on the methods 

states have used to inappropriately maximize federal Medicaid 

reimbursement and have made recommendations to end financing

schemes. CMS has taken important steps in recent years to improve its 

financial management. Yet more can be done. 

Many of the problematic methods we examined involved categories of 

claims where CMS policy has been inconsistently applied, evolving, or 

unspecified. They have also involved increasing payments to units of state 

and local government—which states have long used to maximize federal 

Medicaid funding, in part because IGTs can help facilitate illusory

payments—suggesting that greater CMS attention is needed to payments 

among levels of government, regardless of whether consultants are 

involved. We believe that it is important to act promptly to curb 

opportunistic financing schemes before they become a staple of state 

financing and further erode the integrity of the federal-state Medicaid 

partnership. Addressing recommendations that remain open from our 

prior work on state financing schemes and on CMS’s financial

management could help resolve some of these issues. In addition, in the

report being issued today, we are making new recommendations to the 

Administrator of CMS to improve the agency’s oversight of states’ use of 

contingency-fee consultants and to strengthen certain of the agency’s 

overall financial management procedures. These recommendations 

address developing guidance to clarify CMS policy on TCM, supplemental

payment arrangements, rehabilitation services, and Medicaid 

administrative costs; ensuring that such guidance is applied consistently

among states; and collecting and scrutinizing information from states 

about payments made to units of state and local governments. 

Understandably, states that have relied on certain practices to increase 

federal funds as a staple for the state share of Medicaid spending are 

concerned about the potential loss of these funds. The continuing 

challenge remains to find the proper balance between states’ flexibility to 

administer their Medicaid programs and the shared federal-state fiduciary

responsibility to manage program finances efficiently and economically in 

a way that ensures the fiscal integrity of the program. States should not be 

held solely responsible for developing arrangements that inappropriately 

maximize federal reimbursements where policies have not been clear or

clearly communicated or where CMS has known of risks for some time

and has not acted to mitigate them. Without clear and consistent

communication of policies regarding allowable claims in high-risk areas, 

such as those for TCM and UPL where billions of dollars are claimed each

Conclusions 

Page 21 GAO-05-836T
year, CMS is at risk of treating states inconsistently and of placing undue 

burdens on states to understand federal policy and comply with it. 

Mr. Chairman, this concludes my prepared statement. I will be happy to

answer any questions that you or Members of the Committee may have. 

For future contacts regarding this testimony, please call Kathryn G. Allen 

at (202) 512-7118. Katherine Iritani, Ellen M. Smith, Helen Desaulniers, and 

Kevin Milne also made key contributions to this testimony. 

Contact and

Acknowledgments 

Page 22 GAO-05-836T
Page 23 GAO-05-836T

Related GAO Products 

Medicaid F nancing: S ates’ Use of Con ingency-Fee Consultants to 

Maximize Federal Re mbursements Highligh s Need for Improved Federal 

Oversight. 

i t t

i t

i i t

t ff

I t l f ili i

I i

i t i

i

t ti ti t

t t i i

i I t I

i i i

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t t Ill t

GAO-05-748. Washington, D.C.: June 28, 2005. 

High-R sk Ser es: An Upda e. GAO-05-207. Washington, D.C.: January 2005.

Medicaid Program Integrity: S ate and Federal E orts to Prevent and

Detect Improper Payments. GAO-04-707. Washington, D.C.: July 16, 2004. 

Medicaid: ntergovernmen a Trans ers Have Fac tated State F nancing 

Schemes. GAO-04-574T. Washington, D.C.: March 18, 2004. 

Medicaid: mproved Federal Oversight of State F nancing Schemes Is

Needed. GAO-04-228. Washington, D.C.: February 13, 2004. 

Medicaid F nancial Management: Bet er Overs ght of State Claims for 

Federal Re mbursement Needed. GAO-02-300. Washington, D.C.: 

February 28, 2002. 

Medicaid: HCFA Reversed I s Posi on and Approved Addi onal Sta e 

Financing Schemes. GAO-02-147. Washington, D.C.: October 30, 2001. 

Medicaid: S a e Financ ng Schemes Aga n Drive Up Federal Payments. 

GAO/T-HEHS-00-193. Washington, D.C.: September 6, 2000. 

Medicaid n Schools: mproper Paymen s Demand mprovements in HCFA 

Oversight. GAO/HEHS/OSI-00-69. Washington, D.C.: April 5, 2000. 

Medicaid n Schools: Poor Overs ght and Improper Payments Comprom se

Potent a Bene t. GAO/T-HEHS/OSI-00-87. Washington, D.C.: April 5, 2000. 

Medicaid: Ques ionable Practices Boost Federal Payments for SchoolBased Services. GAO/T-HEHS-99-148. Washington D.C.: June 17, 1999. 

Medicaid: S a es Use usory Approaches to Shif Program Costs to

Federal Government. GAO/HEHS-94-133. Washington, D.C.: August 1, 

1994. 

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