United States Government Accountability Office

GAO Report to Congressional Committees

HEALTH CENTERS 

AND RURAL CLINICS 

State and Federal 

Implementation Issues 

for Medicaid’s New 

Payment System 

June 2005 

 

GAO-05-452 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

June 2005

HEALTH CENTERS AND RURAL CLINICS

State and Federal Implementation Issues 

Highlights of GAO-05-452, a report to for Medicaid’s New Payment System congressional committees

The Medicare, Medicaid, and

SCHIP Benefits Improvement and 

Protection Act of 2000 (BIPA)

established a prospective payment 

system (PPS) for Medicaid 

payments to Federally Qualified

Health Centers (FQHC) and Rural

Health Clinics (RHC), giving

providers a financial incentive to

operate efficiently. BIPA requires 

that BIPA PPS rates be adjusted for

inflation and changes in scope of

services. States also may use an

alternative methodology if it pays

no less than the BIPA PPS rate. In

response to a BIPA mandate, GAO 

reviewed states’ implementation of

the new payment requirements, the 

need to rebase or refine the BIPA

PPS, and the Centers for Medicare 

& Medicaid Services’ (CMS)

oversight of states’ implementation.

GAO surveyed the states about 

their payment methodologies, did a

targeted review in four states, and

reviewed indexes used to reflect 

medical care inflation.

What GAO Recommends

GAO recommends that CMS

explore the development of a more

appropriate inflation index for the

BIPA PPS and improve its guidance 

for states and its oversight of

states’ payment methodologies. 

CMS said it will take steps related 

to its oversight but disagreed on 

the need to issue additional

guidance. CMS also disagreed on

the need to develop an inflation

index; GAO maintained the

recommendation and also elevated

the issue to a matter for

congressional consideration. 

GAO’s review of states’ implementation of Medicaid’s new payment 

system—the BIPA PPS and alternative methodologies—for FQHCs and 

RHCs identified certain issues regarding the appropriateness of some states’ 

methodologies. Most states used the BIPA PPS and about half of states used

an alternative methodology—generally cost-based reimbursement or a PPS 

with features slightly different from those required for the BIPA PPS—to pay 

at least some of their FQHCs, RHCs, or both. States took an average of 

slightly more than a year from the legislation’s January 1, 2001, effective date 

to implement their BIPA PPS, and a few states had not completed 

implementation as of June 1, 2004. GAO identified three significant issues 

with states’ new Medicaid payment systems. First, some states’ BIPA PPS 

payment rates may be inappropriate because they did not include all

Medicaid-covered FQHC and RHC services in the rates as required by law. 

Second, as of June 1, 2004, over half the states using the BIPA PPS had not 

determined how they would make the required adjustment to BIPA PPS 

rates for a change in scope of services. Third, some states did not ensure 

that their alternative methodologies resulted in payments no lower than

what the FQHCs and RHCs would have received under the BIPA PPS. 

Evidence to date is insufficient to determine the need to rebase or refine the

BIPA PPS. Concerns exist that the statutorily specified annual inflation 

index used to adjust the BIPA PPS is inappropriate because it not only

increases more slowly than do many FQHCs’ and RHCs’ costs but also does 

not reflect the services these providers deliver. Other indexes GAO

reviewed had a similar shortcoming. GAO’s analysis determined that no

inflation index has been developed that reflects the services typically

provided by FQHCs and RHCs. Because many states no longer require 

FQHCs and RHCs to submit cost reports, comprehensive and current 

Medicaid cost data are no longer available to help inform an evaluation of 

the need to rebase or refine the BIPA PPS. Although GAO’s comparison of 

cost-based and BIPA PPS rates from four states showed that cost-based

rates generally exceeded BIPA PPS rates, not all factors contributing to the 

higher rates are known. Differences between cost-based and BIPA PPS rates 

varied widely within and among the states reviewed, which also limited the 

ability to draw conclusions about the need to rebase or refine rates.

CMS guidance and oversight regarding the new BIPA payment requirements 

were inadequate to ensure consistent state compliance with the law. CMS

guidance did not fully address certain requirements, and as states developed 

their new payment systems, they lacked important information clarifying the 

new requirements. As a result, uncertainties exist regarding how states were 

to implement some BIPA requirements, such as how to adjust BIPA PPS 

rates to account for a change in scope of services. CMS has conducted 

limited oversight of states’ implementation and therefore was unaware of 

compliance issues with some states’ payment systems. 

www.gao.gov/cgi-bin/getrpt?GAO-05-452.

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.
Contents 

Letter 1

Results in Brief 4

Background 6

States’ Implementation of BIPA PPS and Alternative Methodologies

Raises Certain Issues 10 

Evidence to Date Is Insufficient about the Need to Rebase or 

Refine the BIPA PPS 29 

CMS Guidance and Oversight Did Not Ensure Consistent State 

Compliance with BIPA 36 

Conclusions 40

Matter for Congressional Consideration 41 

Recommendations for Executive Action 41 

Agency and State Comments and Our Evaluation 42 

Appendix I Methodology for Review of Selected States Using 

Cost-Based Reimbursement 45 

Appendix II Overview of Prospective Payment Systems 47 

Appendix III Medicaid Payment Methodologies for FQHCs and 

RHCs, by State, as of June 1, 2004 50 

Appendix IV Comments from the Centers for Medicare & Medicaid 

Services 52 

Appendix V GAO Contact and Staff Acknowledgments 56 

 

Page i GAO-05-452 Medicaid Payment for FQHCs and RHCs
Tables 

Table 1: States’ Use of the BIPA PPS to Make Payments to FQHCs, 

as of June 1, 2004 12 

Table 2: Timetable for States’ Application of the MEI Inflation 

Index to FQHCs’ BIPA PPS Rates 14 

Table 3: States’ Use of the BIPA PPS to Make Payments to RHCs, 

as of June 1, 2004 15 

Table 4: Timetable for States’ Application of the MEI Inflation 

Index to RHCs’ BIPA PPS Rates 17 

Table 5: Alternative Payment Methodologies for FQHCs, as of June

1, 2004 19 

Table 6: States That Used Limits in Determining Reasonable Costs 

for FQHCs under Cost-Based Reimbursement Alternative 

Methodologies, by Type of Limit, as of June 1, 2004 21 

Table 7: Characteristics of Alternative PPSs for FQHCs, by State, as 

of June 1, 2004 22 

Table 8: Alternative Payment Methodologies for RHCs, as of June

1, 2004 24 

Table 9: States That Used Limits in Determining Reasonable Costs 

for RHCs under Cost-Based Reimbursement Alternative 

Methodologies, by Type of Limit, as of June 1, 2004 25 

Table 10: Characteristics of Alternative PPSs for RHCs, by State, as 

of June 1, 2004 26 

Table 11: Percentage Increase of the MEI Compared to Increases

for Other Indexes Commonly Used to Adjust for Medical

Care Inflation (2001 to 2003) 31 

Table 12: States’ Cost Reporting Requirements for FQHCs and 

RHCs, as of June 2004 33 

Table 13: Comparison of Key Features of BIPA PPS to Selected 

Other PPSs 49 

Figures 

Figure 1: States’ Implementation of the BIPA PPS for FQHCs, as of

June 1, 2004 13 

Figure 2: States’ Implementation of the BIPA PPS for RHCs, as of 

June 1, 2004 16 

Figure 3: Percentage Difference in Cost-Based and BIPA PPS 

Rates, by State and Provider Type, 2001 through 2003 35 

Page ii GAO-05-452 Medicaid Payment for FQHCs and RHCs
Figure 4: Timeline Showing CMS’s Issuance of Guidance and 

Approval of States’ Plans to Implement BIPA’s Medicaid 

Payment Provisions 37 

Abbreviations 

BIPA Medicare, Medicaid, and SCHIP Benefits Improvement

 and Protection Act of 2000 

CMS Centers for Medicare & Medicaid Services 

CPI Consumer Price Index 

FQHC Federally Qualified Health Center

HHS Department of Health and Human Services

HRSA Health Resources and Services Administration 

MEI Medicare Economic Index 

PPI Producer Price Index 

PPS prospective payment system 

RHC Rural Health Clinic 

SPA state plan amendment 

UDS Uniform Data System

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Page iii GAO-05-452 Medicaid Payment for FQHCs and RHCs
United States Government Accountability Office

Washington, DC 20548 

 

June 17, 2005 

The Honorable Charles E. Grassley 

Chairman 

The Honorable Max Baucus 

Ranking Minority Member

Committee on Finance 

United States Senate 

The Honorable Joe Barton

Chairman 

The Honorable John D. Dingell

Ranking Minority Member

Committee on Energy and Commerce 

House of Representatives 

To increase the accessibility of primary and preventive health services for 

low-income people living in medically underserved areas, Congress made

Federally Qualified Health Centers (FQHC) and Rural Health Clinics 

(RHC) eligible for payments from Medicaid, a joint federal-state program 

that finances health insurance for certain low-income adults and children.1

FQHCs are urban or rural centers that provide comprehensive communitybased primary care services to individuals regardless of their ability to pay.

In 2003, there were approximately 900 FQHCs. The nation’s approximately

3,600 RHCs provide similar primary care services in underserved rural 

areas, but unlike FQHCs, RHCs are not required to provide services to all 

individuals, such as those who are uninsured.2 Medicaid is a significant 

revenue source for FQHCs and RHCs; according to the most recent data

available, it accounted for about 35 percent of total revenues for FQHCs 

 1

The Rural Health Clinic Services Act of 1977, Pub. L. No. 95-210, § 2, 91 Stat. 1485, 1488, 

authorized Medicaid payment for RHCs for covered services; the Omnibus Budget

Reconciliation Act of 1989, Pub. L. No. 101-239, § 6404, 103 Stat. 2106, 2264, established 

FQHCs as a new provider type and authorized Medicaid payment for covered services. 

2

The number of RHCs is as of August 2004. 

Page 1 GAO-05-452 Medicaid Payment for FQHCs and RHCs
and 24 percent for RHCs.3

 In fiscal year 2003, Medicaid payments to

FQHCs and RHCs were almost $1.5 billion. 

Historically, federal law required state Medicaid programs to reimburse 

FQHCs and RHCs on the basis of reasonable costs—that is, costs that are 

not excessive for a type of service provided to Medicaid beneficiaries. 

While this basis for reimbursement may have ensured that service 

providers were paid for necessary costs, it was also regarded as potentially

inflationary because providers may have increased their payments by 

raising their costs. The Medicare, Medicaid, and SCHIP Benefits 

Improvement and Protection Act of 2000 (BIPA) changed Medicaid 

payment requirements by establishing a new prospective payment system

(PPS) effective for services provided by FQHCs and RHCs on or after 

January 1, 2001.4

 Unlike cost-based reimbursement, a PPS creates financial 

incentives for providers to operate more efficiently. Providers that keep 

their costs below their payment amount profit; conversely, providers lose 

money if their service costs exceed the payment amount. 

Although not typical of other PPSs, the BIPA PPS established a providerspecific rate for the first year’s payment rate (2001). Specifically, states 

were to set the base rate at the average of each FQHC’s or RHC’s fiscal

year 1999 and fiscal year 2000 reasonable costs per visit. In subsequent 

years, states were to use the Medicare Economic Index (MEI) to increase

payment rates annually for inflation and were to adjust rates when 

necessary to reflect a change in scope of services. States may use an

alternative methodology to reimburse some or all of their FQHCs and 

RHCs if they can demonstrate that the alternative payment methodology 

would result in payments no lower than under the BIPA PPS payment rate

and if the FQHC or RHC agrees to its use. 

 3

FQHC revenue data, which are as of 2003, are from the Uniform Data System (UDS), a

database of self-reported FQHC data maintained by the Health Resources and Services

Administration (HRSA). RHC data are from a 2000 National Rural Health Clinic Survey

conducted by the Maine Rural Health Research Center that was sent to a random sample of 

approximately one-half of the nation’s RHCs. 

4

Pub. L. No. 106-554, app. F, § 702, 114 Stat. 2763A-463, 2763A-572. BIPA amended Medicaid

requirements to require states to reimburse FQHCs and RHCs under the new PPS or an

alternative methodology. (These requirements were originally designated in BIPA as

subsection (aa) of section 1902 of the Social Security Act, but technical amendments to

BIPA redesignated them subsection (bb). Native American Breast and Cervical Cancer

Treatment Technical Amendment Act of 2001, Pub. L. No. 107-121, § 2(b)(1), 115 Stat. 

2384.) Throughout this report we refer to the PPS specifically set out in section 702 of BIPA

as the BIPA PPS. 

Page 2 GAO-05-452 Medicaid Payment for FQHCs and RHCs
BIPA required that we study the need for, and how to, rebase and refine

costs for making Medicaid payments to FQHCs and RHCs.5

 We 

(1) reviewed states’ implementation of the Medicaid payment system 

under BIPA for FQHCs and RHCs, (2) evaluated the need for rebasing or

refining costs for making payment under the BIPA PPS, and (3) reviewed 

the Centers for Medicare & Medicaid Services’ (CMS) oversight of states’

Medicaid payment systems for FQHCs and RHCs.

To examine these issues, we surveyed Medicaid officials in the 50 states 

and the District of Columbia regarding their FQHC and RHC 

reimbursement policies and practices as of June 1, 2004.6

 States also 

submitted documentation describing their methodologies, which we

reviewed to corroborate their survey responses. In addition to conducting 

the survey, we reviewed the MEI, the index required by statute to annually 

adjust BIPA PPS rates for inflation, as well as other indexes often used to

reflect changes in medical care inflation. To identify these other indexes, 

we reviewed literature on medical care indexes and information from

organizations typically involved in developing and updating these indexes. 

We also conducted a targeted review of FQHC and RHC payment rates in

four states—Iowa, Vermont, Virginia, and Wisconsin—that used costbased reimbursement as an alternative methodology. (See app. I for details 

about the methodology of our targeted review.) We interviewed officials 

from CMS and its regional offices; CMS is the agency within the 

Department of Health and Human Services (HHS) that oversees states’ 

Medicaid programs. We also interviewed officials from HHS’s Health

Resources and Services Administration (HRSA), which is responsible for 

reviewing FQHC grant applications and disbursing federal public health

grant funds to FQHCs. To provide contextual information, we interviewed 

various stakeholders. Specifically, we interviewed officials from the 

National Association of Community Health Centers (an organization 

representing FQHCs), the National Association of Rural Health Clinics, 

George Washington University’s Center for Health Services and Policy (an 

organization that has conducted research on FQHCs), and a judgmentally

selected sample of eight FQHCs and eight RHCs. We performed our work 

from July 2004 through May 2005 in accordance with generally accepted

government auditing standards. 

 5

BIPA § 702(d), 103 Stat. 2763A-574. 

6

Throughout this report, the term state refers to the 50 states and the District of Columbia. 

Page 3 GAO-05-452 Medicaid Payment for FQHCs and RHCs
Our analysis of states’ implementation of Medicaid’s new payment 

system—the BIPA PPS and alternative methodologies—to pay FQHCs and 

RHCs identified certain issues about the appropriateness of some states’

methodologies. Most states implemented the BIPA PPS and just under half

of states used an alternative methodology—generally cost-based 

reimbursement or a PPS with features differing slightly from the BIPA 

PPS—to pay at least a portion of their FQHCs or RHCs; and some states

used more than one methodology. States took an average of slightly more 

than a year to implement their BIPA PPS, and a few states had not 

completed implementation as of June 1, 2004. We noted three significant 

issues regarding states’ payment methodologies—two related to the BIPA 

PPS and one related to alternative methodologies. First, some states’ BIPA 

PPS payment rates may be inappropriate because the states did not 

include all Medicaid-covered FQHC and RHC services in determining the 

rates. Second, over half of states using the BIPA PPS had not determined 

how they would address the requirement to adjust their BIPA PPS rates for

a change in scope of services. Third, not all states with alternative 

methodologies ensured that they resulted in payment at least equal to

what FQHCs and RHCs would have received under the BIPA PPS, as 

required by statute. 

Results in Brief

Evidence to date is insufficient to determine the need to rebase or refine

the BIPA PPS. Concerns exist about the appropriateness of the MEI, the 

index required by statute to annually adjust BIPA PPS rates for inflation. 

For example, the MEI was designed to measure the changing costs for the 

average physician, which may be different from the costs of FQHCs and 

RHCs. FQHCs often provide additional services, such as translation, and a 

significant portion of RHC services may be provided by nonphysician 

practitioners. Other indexes often used to reflect medical care inflation 

have a similar shortcoming as they also do not reflect the services typically

provided by FQHCs and RHCs. Although the MEI may not be an 

appropriate index, we determined that no inflation index is currently 

available that reflects these services. Determining the need for rebasing or 

refining is further complicated by the increasing lack of comprehensive 

and current cost data because many states no longer require all FQHCs 

and RHCs to submit cost reports. Our comparison of cost-based and BIPA 

PPS rates from four states that used cost-based reimbursement as an 

alternative payment methodology did not provide conclusive evidence on 

the need to rebase or refine the BIPA PPS. Specifically, cost-based rates 

for these states generally were higher than the BIPA PPS rates for most

providers, but it is unclear if this is because providers lacked the incentive 

to deliver services efficiently or because they were operating efficiently 

but their costs were higher than what the BIPA PPS would pay. 

Page 4 GAO-05-452 Medicaid Payment for FQHCs and RHCs
CMS guidance for and oversight of states’ implementation of the new

BIPA-mandated payment requirements for FQHCs and RHCs were

inadequate to consistently ensure states’ compliance with the law.

Although CMS issued guidance, it did not address how states were to

implement some BIPA requirements, such as how to adjust BIPA PPS rates

to account for a provider’s change in scope of services and the relevance 

of this requirement to states using alternative payment methodologies.

Moreover, CMS has conducted limited oversight of states’ implementation 

of the new payment system for FQHCs and RHCs. Instead, CMS has relied 

on states’ assurances that they were in compliance with BIPA and

investigated payment issues only in response to complaints, which CMS 

said were rare, or when payment issues were raised during a CMS review

conducted for other purposes. As a result of its limited oversight, CMS was 

unaware of certain compliance issues with states’ payment methodologies 

for FQHCs and RHCs, such as that some states’ alternative methodologies 

did not comply with BIPA’s requirement that these methodologies result in

payment no lower than what FQHCs and RHCs would have received under 

the BIPA PPS. 

This report includes a matter for congressional consideration and several

recommendations to the Administrator of CMS. We suggest that Congress 

consider directing CMS to explore the development of a more appropriate 

inflation index or develop a strategy to periodically assess the adequacy of

the MEI as an inflation index for adjusting BIPA PPS rates. We are 

recommending that the Administrator of CMS also explore the 

development of a more appropriate inflation index for the BIPA PPS, take 

various steps to improve CMS guidance for states, and provide more 

consistent oversight of states’ payment methodologies for FQHCs and 

RHCs. In commenting on a draft of this report, CMS said it would take

certain actions related to its oversight of states’ payment methodologies 

for FQHCs and RHCs, but did not agree that development of another 

inflation index or issuance of additional guidance were necessary. We 

believe that the CMS response does not adequately address the issues 

raised in this report, as its proposed actions may not be sufficient to

ensure states’ compliance with BIPA. In addition, we continue to believe 

that CMS should explore developing an inflation index that more 

appropriately reflects the services provided by FQHCs and RHCs. We 

therefore maintained this recommendation and also elevated the issue to a 

matter for congressional consideration. 

Page 5 GAO-05-452 Medicaid Payment for FQHCs and RHCs
The FQHC and RHC programs were established to increase access to care 

for individuals in medically underserved areas. Medicaid, which finances 

health care for more than 50 million low-income Americans, is a 

significant revenue source for FQHCs and RHCs, providing, on average,

one-quarter to over one-third of these providers’ revenues. 

To be designated an FQHC, a facility generally must meet the requirements

of a grant recipient under section 330 of the Public Health Service Act; be 

a public or private nonprofit entity that provides a statutorily required set

of primary care services to any individual, regardless of ability to pay; and 

serve the medically underserved.

7

 In fiscal year 2002, the President 

launched the Health Center Initiative with the goal of adding 1,200 new or

expanded health center sites and increasing the number of patients served 

from about 10 million in fiscal year 2001 to 16 million by 2006. In 2003, the 

approximately 900 FQHCs provided services to over 12 million people.

8

Background 

Characteristics of FQHCs 

and RHCs 

FQHCs include community health centers, migrant health centers, public

housing and homeless programs, FQHC look-alikes, and certain facilities

operated by tribes or tribal organizations.9

 A distinguishing feature of

FQHCs is that they provide enabling services such as outreach, translation,

and transportation, which help patients gain access to health care. FQHCs 

vary considerably in their geographic location; their revenue mix; and the 

size of the uninsured and Medicaid populations and degree of managed 

care penetration in the surrounding area. For example, an FQHC may be

located in an urban area with a large uninsured or Medicaid population 

and a high Medicaid managed care penetration, or in a rural area, where it

serves as the only source of primary care for several communities. 

Unlike FQHCs, RHCs are not required to provide services to all 

individuals, such as those who are uninsured, but they are required to 

 7

42 U.S.C. § 254b (2000). All section 330 health center grantees are designated as FQHCs,

making them certified Medicaid providers and therefore eligible for Medicaid

reimbursement. 

8

The data only include the federally funded FQHCs that report to the UDS database. 

9

FQHC look-alikes are facilities that HRSA deems have met all of the requirements to be a 

grant recipient under section 330 of the Public Health Service Act but do not receive the 

federal grant.

Page 6 GAO-05-452 Medicaid Payment for FQHCs and RHCs
operate in rural areas that are designated as underserved.10 RHCs can 

operate either independently or as part of a larger organization, such as a 

hospital, skilled nursing facility, or home health agency. RHCs can be 

specialty clinics, focusing their services on particular populations or

medical specialties such as pediatrics or obstetrics and gynecology. In 

addition to being located in a rural, underserved area, to be certified by

CMS as an RHC, a provider must primarily offer outpatient primary 

medical care, employ at least one nonphysician practitioner at least half

the time the clinic is open, and have a physician on-site at least once every 

2 weeks.11 As of August 2004, approximately 3,600 RHCs operated in 44 

states.12

In 2003, Medicaid reimbursement and HRSA grant funds were the two 

largest single sources of revenue for FQHCs and accounted for 35 percent

and 22 percent of these providers’ total revenue, respectively. FQHCs also 

received revenues from state, local, and private grants as well as other 

insurance programs.

13 In contrast, RHCs received a smaller proportion of

their total revenues from Medicaid (24 percent) but a higher proportion 

from Medicare, commercial insurance, and directly from patients (selfpay).14 Although Medicaid is a large revenue source for FQHCs and RHCs, 

payments to these providers represent a very small percentage of overall 

 10RHCs must be located in an area designated by HRSA as either a Health Professional

Shortage Area (an area that has a critical shortage of physicians available to serve the

people living there), a HRSA-designated Medically Underserved Area (an area or

population with a shortage of health care services), or an area designated by the governor

of the state as a shortage area.

11Nonphysician practitioner refers to a nurse practitioner, physician assistant, or certified 

nurse midwife. 

12Connecticut, Delaware, the District of Columbia, Maryland, Massachusetts, New Jersey, 

and Rhode Island reported that they have no RHCs. We could not identify current or

reliable data on the number of people served by RHCs. 

13State, local, and private grants accounted for approximately 13 percent of FQHCs’ total 

revenues in 2003. Other revenue sources included commercial insurance (6 percent), 

payments directly from patients (6 percent), Medicare (5 percent), and other public

insurance (3 percent). The remaining 10 percent of revenue came from miscellaneous

funding sources, including other federal grants, revenue from indigent care programs, and

other revenue. These 2003 data are from the UDS database. 

14RHCs received approximately 30 percent of their revenue from Medicare, 30 percent from

commercial insurance, 15 percent directly from patients, and the remaining from other

miscellaneous sources. These data, the most recent available, are from a 2000 National

Rural Health Clinic Survey. The survey, conducted by the Maine Rural Health Research

Center, was sent to a random sample of approximately one-half of the nation’s RHCs. 

Page 7 GAO-05-452 Medicaid Payment for FQHCs and RHCs
Medicaid expenditures. In fiscal year 2003, Medicaid payments to FQHCs 

and RHCs totaled almost $1.5 billion combined, which accounted for less 

than 1 percent of Medicaid expenditures for medical care. 

Medicaid Reimbursement 

for FQHCs and RHCs 

Prior to 2001, federal law required state Medicaid programs to pay FQHCs 

and RHCs using a cost-based reimbursement methodology. To determine 

cost-based payments, states required FQHCs and RHCs to submit cost

reports, which states reviewed to determine which reported costs were

allowable (related to providing services to Medicaid beneficiaries) and 

reasonable (not excessive for the type of service). The Medicaid statute 

directed states to follow the Medicare statute to reimburse FQHCs and 

RHCs. This meant that states were to reimburse FQHCs and RHCs 

according to CMS Medicare regulations, which provide guidance on the 

types of allowable costs, such as compensation for physicians and other 

staff, supplies, administrative overhead, and other items. The regulations 

allowed states to establish their own definition of what constituted 

“reasonable costs,” which could include a ceiling on costs per service, 

such as a medical visit, or a limit on a type of cost, such as administrative 

costs. 

In December 2000, BIPA established a PPS to pay for Medicaid-covered 

services provided by FQHCs and RHCs. While BIPA did not specify when 

states had to implement the PPS, the statute required that the BIPA PPS be 

effective for services provided by FQHCs and RHCs on or after January 1, 

2001. Unlike the prior cost-based reimbursement system, a PPS establishes 

payment rates in advance of service delivery and creates incentives for 

providers to operate more efficiently. Generally, the payment is not

contingent on an individual provider’s actual cost of delivering care. 

Providers that, on average, deliver care for less than the payment amount 

can retain the portion of the payment amount exceeding their costs; 

conversely, providers will lose money if their service costs are higher than

the payment. (See app. II for additional general information on PPSs, 

including how the BIPA PPS compares with selected other PPSs.) 

Under the PPS mandated by BIPA, the 2001 payment rate, called the base 

rate, was effective for services provided beginning January 1, 2001. The 

2001 payment rate was to be the average of each FQHC’s and RHC’s fiscal

year 1999 and fiscal year 2000 reasonable costs per visit, which states were 

allowed to determine using their prior definitions of reasonable costs. 

Beginning in fiscal year 2002, BIPA PPS payment rates were to be adjusted 

annually for inflation by the MEI. In addition, BIPA required that payments

to FQHCs and RHCs be adjusted for increases or decreases in the scope of

Page 8 GAO-05-452 Medicaid Payment for FQHCs and RHCs
services provided. States also were required to make supplemental

payments to FQHCs and RHCs that provide services to Medicaid patients

enrolled in a capitated managed care plan.

15 BIPA allowed states to use an 

alternative methodology to pay an FQHC or RHC as long as the FQHC or 

RHC agreed to the alternative methodology and the methodology resulted 

in payment to the FQHC or RHC of an amount that was no lower than the 

amount otherwise required under the BIPA PPS.16

In June 2001, we reported that payments to FQHCs and RHCs under the 

new BIPA PPS would likely be constrained.

17 The report noted that

because states were allowed to continue to use their prior methods for 

determining reasonable costs in establishing the 2001 base payment rate 

under the BIPA PPS, the initial PPS rates for FQHCs and RHCs might be

below their actual costs. Additionally, the 2001 base PPS rate could be 

lower than what an FQHC or RHC received in 2000 because the base rate 

was an average of fiscal years’ 1999 and 2000 costs. Furthermore, BIPA did 

not specify that the initial 2001 payment rates be updated for inflation 

from 1999 through 2001. We also reported that the specific inflation index 

BIPA required states to use, the MEI, increased at a lower rate than other 

measures of inflation that some states had previously used to adjust

FQHCs’ payment rates. 

State Plan Approval 

Process 

To comply with BIPA’s January 1, 2001, effective date, states were 

required to submit a state plan amendment (SPA) for the new FQHC and 

 

l

t

15Under a capitated managed care model, states contract with managed care organizations

and prospectively pay them a fixed monthly fee per patient to provide or arrange for most

health services. The managed care organizations, in turn, pay providers either

retrospectively for each service delivered on a fee-for-service basis or through prospective 

capitation payment arrangements. BIPA required states to compare the aggregate managed 

care plans’ payments to the amount that an FQHC or RHC would have received under the

BIPA PPS methodology. If the total managed care payments were less, states were required

to pay FQHCs and RHCs the difference.

16States also may seek a waiver of the BIPA payment requirements. Under section 1115 of

the Social Security Act, the Secretary of Health and Human Services has broad authority to

approve demonstration projects that the Secretary determines are likely to promote 

Medicaid objectives. 42 U.S.C. § 1315 (2000). The Secretary may waive certain provisions of

the statute if the Secretary finds it necessary for the performance of the experimental, 

pilot, or demonstration projects. For this report, we refer to demonstration projects

approved under section 1115 as 1115 waiver programs. 

17See GAO, Hea th Centers and Rural Clinics: Payments Likely to Be Constrained Under 

Medicaid’s New Sys em, GAO-01-577 (Washington, D.C.: June 19, 2001).

Page 9 GAO-05-452 Medicaid Payment for FQHCs and RHCs
RHC Medicaid payment requirements by the end of the first quarter of

2001 (March 31, 2001).18 To aid states in meeting this deadline, CMS 

provided them with standard language that they could submit as a

placeholder SPA that would allow them to comply technically with the 

submission deadline.19, 20 According to CMS, states could subsequently 

update their SPAs with the specifics of their methodology before CMS 

review. 

Once CMS receives a SPA, it has 90 days to approve it, disapprove it, or 

request additional information from the state.21 Upon receipt of any 

additional state information requested, CMS has an additional 90 days to

approve or disapprove the SPA.22 According to CMS, its regional offices 

have primary responsibility for review and approval of SPAs but 

coordinate with headquarters, which is responsible for making any final

disapprovals. 

Our analysis of states’ implementation of the BIPA PPS and alternative 

methodologies identified certain issues regarding the appropriateness of

some states’ Medicaid payment systems for FQHCs and RHCs. Most states 

(39) used the BIPA PPS and just under half of states (25) used the BIPA 

option of an alternative methodology to pay at least a portion of their 

FQHCs, RHCs, or both. (See app. III for the portion of FQHCs and RHCs, 

by state, paid under each methodology.) States took an average of slightly 

more than a year from the legislation’s January 1, 2001, effective date to 

complete implementation of their BIPA PPS, and a few states had not

completed implementation as of June 1, 2004. We found two significant 

States’ 

Implementation of 

BIPA PPS and

Alternative 

Methodologies Raises 

Certain Issues 

 18SPAs may take effect no earlier than the first day of the quarter in which an approvable

plan is submitted to CMS. Thus, in order for a SPA to be effective on January 1, 2001, it had 

to be submitted to the CMS regional office by the end of the first quarter of 2001, which

was March 31, 2001. 

19At the time the standard language was provided to states, the agency was known as the 

Health Care Financing Administration. On June 14, 2001, the Secretary of Health and 

Human Services announced that the agency’s name would change to the Centers for

Medicare & Medicaid Services. Throughout this report, we refer to the agency as CMS. 

20The standard language said that the state would comply with the BIPA payment

requirements by implementing the BIPA PPS, an alternative methodology, or both. 

2142 C.F.R. § 430.16 (2004). 

22If the state does not respond to CMS’s request for information within 90 days, CMS 

disapproves the SPA. 

Page 10 GAO-05-452 Medicaid Payment for FQHCs and RHCs
issues with states’ implementation of the BIPA PPS. First, some states’

BIPA PPS payment rates may be inappropriate because the states did not 

include all Medicaid-covered FQHC and RHC services in the rates. Second, 

as of June 1, 2004, over half of states using the BIPA PPS had not 

determined how they would meet the requirement to adjust their BIPA 

PPS rates for a change in scope of services. States implementing an 

alternative methodology generally used either cost-based reimbursement

or a PPS with features that differed slightly from the BIPA PPS. We found 

one issue with states’ implementation of alternative payment 

methodologies. In establishing their alternative payment methodologies, 

some states did not ensure that payments to FQHCs and RHCs were at

least equal to what the BIPA PPS would pay, as required by law.

BIPA PPS Implemented in

Most States, but Issues 

Exist 

The BIPA PPS was implemented in most states, but we noted issues with 

the appropriateness of some states’ methodologies. Thirty-nine states used

the BIPA PPS to pay at least a portion of their FQHCs, RHCs, or both—27 

used it for both FQHCs and RHCs, 6 used it for FQHCs only, and 6 for 

RHCs only. While a few states had yet to completely implement their BIPA 

PPS as of June 1, 2004, it took the remaining states an average of 15 to 16

months to complete implementation of their methodologies. We found two 

issues with some states’ BIPA PPSs. Of the states using the BIPA PPS, 

more than a third reported that they did not include all Medicaid-covered 

FQHC and RHC services in their BIPA PPS payment rates and over half

had either not defined procedures for adjusting FQHCs’ and RHCs’ BIPA 

PPS rates for a change in scope of services, an adjustment required by 

BIPA, or not specified what would constitute such a change. 

Thirty-three of 51 states reported using the BIPA PPS to pay some portion 

of their FQHCs. The BIPA PPS was the only payment methodology used 

for FQHCs in 27 of the states, while in the remaining 6 states only a

portion of FQHCs received Medicaid payments under the BIPA PPS (see 

table 1).23

Implementation of BIPA PPS 

for FQHCs 

 23Since Minnesota intended for all FQHCs to be paid under the BIPA PPS, we have included

it in the 27 states that paid FQHCs only under the BIPA PPS. The state, however, had not

completed implementation of its BIPA PPS as of June 1, 2004. As such, many FQHCs in

Minnesota were being paid under an interim payment method. 

Page 11 GAO-05-452 Medicaid Payment for FQHCs and RHCs
Table 1: States’ Use of the BIPA PPS to Make Payments to FQHCs, as of June 1, 

2004 

Portion of FQHCs Number of states States 

All 27 Alabama, Connecticut, Delaware, District 

of Columbia, Florida, Georgia, Hawaii, 

Idaho, Illinois, Indiana, Kentucky, 

Louisiana, Maine, Maryland, Minnesota,

a

Mississippi, Montana, Nevada, Ohio, 

Oklahoma, Oregon, Pennsylvania, Rhode 

Island, South Dakota, Tennessee, 

Washington, and Wyoming 

Most (50% to <100%) 2 New York and North Dakota 

Some (>0% to <50%) 4 California, North Carolina, Utah, and

Wisconsin 

Source: GAO analysis of state survey responses. 

a

Although the state intended to use the BIPA PPS to pay all FQHCs, it had not fully implemented its

methodology. As a result, many FQHCs were being paid under an interim payment method.

Thirty-two states reported they had completed implementation of their 

BIPA PPS for FQHCs as of June 1, 2004, while one had not fully 

implemented its methodology. On average, it took states 15 months from

BIPA’s effective date—January 1, 2001—to complete implementation of

their BIPA PPS for FQHCs. Implementation time periods ranged from 3 

months to about 3 years (see fig. 1). Although Minnesota intended to

implement the BIPA PPS for all of its FQHCs, as of June 1, 2004, the state 

had implemented this methodology for only 30 percent of its FQHCs. 

Minnesota was paying the remaining FQHCs an interim rate until the state 

determined these providers’ BIPA PPS rates.24 Regardless of the actual

implementation date, most states implementing a BIPA PPS (30 of 33 

states) made the payment rates retroactive to January 1, 2001.25 The three 

 24According to a state official, as of September 2004, Minnesota’s implementation of the 

BIPA PPS was delayed because the state had not finished its review of FQHCs’ 1999 and

2000 cost reports. Until the cost reports were reviewed, the state was paying FQHCs

interim rates, which were based on FQHCs’ preliminary 1999 and 2000 cost reports and 

inflated annually by the MEI. Once the cost reports were reviewed and finalized, the state 

planned to determine final BIPA PPS rates and settle the differences between the final and 

interim rates. 

25Although BIPA did not specify when states had to implement their methodology, it

required the methodology to be effective for services provided on or after January 1, 2001. 

BIPA § 702, 114 Stat. 2763A-573. 

Page 12 GAO-05-452 Medicaid Payment for FQHCs and RHCs
remaining states had an alternative payment methodology initially but

subsequently implemented the BIPA PPS.26

Figure 1: States’ Implementation of the BIPA PPS for FQHCs, as of June 1, 2004 

Note: Thirty-three states paid at least some FQHCs using the BIPA PPS, but the figure does not

include Minnesota, which had not completed implementation of its BIPA PPS as of June 1, 2004.

Although BIPA specified how states were to determine the base payment

rate and which inflation index to use, states designed their systems 

differently within these parameters. For example, BIPA specified that

beginning in fiscal year 2002, the BIPA PPS base rate was to be increased 

annually for inflation using the MEI, but the law did not define which 12-

month period constituted the 2002 fiscal year.27 States had the option of

using the federal, state, or FQHC fiscal year and varied as to the month 

they first inflated the PPS rates. Most states first inflated their FQHCs’

base payment rates in either October 2001, which corresponds to the 

 26In Kentucky, the change to BIPA PPS rates was effective as of July 1, 2001, in Washington

the change was effective as of January 1, 2002, and in Indiana the change was effective as

of July 1, 2002. All three states reported that between January 1, 2001 (the effective date of

the BIPA PPS legislation), and the effective date of their BIPA PPS rates, they had 

reimbursed or planned to reimburse the FQHCs the higher of their reasonable costs or

their BIPA PPS rate. 

27Four states—Idaho, Indiana, Kentucky, and Minnesota—reported inflating FQHCs’ 1999

and 2000 costs prior to averaging them to determine the base rates. According to CMS, 

inflating 1999 and 2000 costs prior to averaging them was an acceptable approach to

calculating the base rate under the BIPA PPS. 

Page 13 GAO-05-452 Medicaid Payment for FQHCs and RHCs
federal and one state’s fiscal year, or January 2002, the beginning of the 

calendar year. A few states inflated FQHC payment rates earlier in 2001, 

and one state—Louisiana—did not inflate rates until July 2002. (See table 

2.) States also varied in the number of PPS rates they established for each 

FQHC. Specifically, 10 states decided to establish more than one PPS rate

for each FQHC, depending on the type of service provided.28 For example, 

FQHCs in Maryland had two rates—one for medical services and one for 

dental services. In Ohio, FQHCs could have as many as nine PPS rates 

depending on the specific services provided.29

Table 2: Timetable for States’ Application of the MEI Inflation Index to FQHCs’ BIPA 

PPS Rates 

Date MEI first applied Number of states States 

January 2001 3 North Carolina,a Oregon, and Utah 

July 2001 2 Delaware and Oklahoma 

October 2001 13 Alabama, California, Connecticut, 

Florida, Georgia, Idaho, Maine,

Nevada, New York, Ohio, 

Pennsylvania, Rhode Island, and 

Tennessee 

January 2002 14 District of Columbia, Hawaii, Illinois, 

Indiana, Kentucky, Maryland, 

Minnesota, Mississippi, Montana, 

North Dakota, South Dakota, 

Washington, Wisconsin, and Wyoming

July 2002 1 Louisiana 

Source: GAO analysis of state survey responses. 

a

January 2001 was the first date that North Carolina may have applied the MEI to any FQHC’s BIPA

PPS rate. However, the actual date that the MEI was applied varied by FQHC because the state

calculated BIPA PPS rates on the basis of each FQHC’s cost reporting year.

 28The 10 states were Connecticut, Hawaii, Idaho, Illinois, Maryland, Minnesota, Ohio, 

Pennsylvania, Tennessee, and Washington. 

29The nine PPS rates in Ohio corresponded to the following services: medical, dental, 

mental health, podiatry, vision, speech, transportation, physical therapy, and chiropractic 

services. 

Page 14 GAO-05-452 Medicaid Payment for FQHCs and RHCs
Of the 44 states with RHCs, 33 states reported using the BIPA PPS to pay 

some portion of their RHCs. Twenty-five states paid all RHCs and 8 states 

paid a portion of RHCs under the BIPA PPS.30 (See table 3.) 

Implementation of BIPA PPS 

for RHCs

Table 3: States’ Use of the BIPA PPS to Make Payments to RHCs, as of June 1, 2004 

Portion of RHCs Number of states States

All 25 Alabama, Arkansas,

a

 Florida, Hawaii, 

Idaho, Illinois, Indiana, Kentucky, 

Louisiana, Maine, Michigan, Minnesota,

a

Mississippi, Montana, Nevada, New

York, Ohio, Oklahoma, Oregon, 

Pennsylvania, South Dakota, 

Tennessee, Utah, Washington, and 

Wyoming 

Most (50% to <100%) 2 Georgia and North Dakota

Some (>0% to <50%) 6 California, Iowa, Kansas,b North

Carolina, Texas, and Virginia 

Source: GAO analysis of state survey responses. 

a

Although the state intended to use the BIPA PPS to pay all RHCs, it had not fully implemented its

methodology. As a result, many RHCs were being paid under an interim payment method.

b

This state had not fully implemented its BIPA PPS; thus, some RHCs were being paid under an 

interim payment method. Other RHCs in this state opted to be paid under an alternative methodology.

As of June 1, 2004, 30 of the 33 states using the BIPA PPS to pay some 

portion of their RHCs had completed implementing their payment

methodologies, taking an average of 16 months. Implementation time

periods ranged from 4 months to over 3 years (see fig. 2). The remaining 3 

states were still in the process of implementing their BIPA PPS as of June 

1, 2004: over 80 percent of Minnesota’s RHCs, about 40 percent of

Arkansas’s RHCs, and less than 10 percent of Kansas’s RHCs did not have 

finalized BIPA PPS rates. Regardless of when the methodologies were

implemented, the BIPA PPS rates were retroactive to January 1, 2001, in 

 30Since Arkansas and Minnesota intended to pay all RHCs under the BIPA PPS, they are 

included in the 25 states that pay RHCs only under the BIPA PPS. Since these states had yet

to complete implementation of their BIPA PPS, as of June 1, 2004, they paid many RHCs 

under an interim payment method. Kansas also had not completed implementation of its

BIPA PPS, but most of its RHCs opted to be paid under an alternative methodology. Thus,

only some RHCs in Kansas were to be paid under the BIPA PPS. 

Page 15 GAO-05-452 Medicaid Payment for FQHCs and RHCs
all states except Washington, where the rates became effective 1 year 

later, and Kentucky, where the rates became effective in July 2001.31

Figure 2: States’ Implementation of the BIPA PPS for RHCs, as of June 1, 2004 

Note: Thirty-three states paid at least some RHCs using the BIPA PPS, but the figure does not

include 3 states—Arkansas, Kansas, and Minnesota—which had not completed implementation of

their BIPA PPS as of June 1, 2004.

As with FQHCs, states varied in their design of certain features of their 

BIPA PPS for RHCs. Specifically, because of differences in when fiscal

years began, states varied as to when they first inflated their BIPA PPS 

base rates.32 Most states first inflated their RHCs’ base payment rates in

either October 2001 or January 2002. A few states inflated RHC payment 

rates earlier in 2001 and one state did not inflate rates until July 2002. (See

table 4.) In addition, four states paid RHCs with multiple BIPA PPS

 31In 2001, Washington paid RHCs under an alternative payment methodology—cost-based 

reimbursement—in which RHCs were paid 100 percent of their reasonable costs.

According to the state, this alternative methodology paid at a rate greater than what the 

RHCs would have received under the BIPA PPS and thus complied with BIPA 

requirements. In 2002, the state switched to paying all RHCs under the BIPA PPS 

methodology. Similarly, prior to the effective date of its BIPA PPS, Kentucky paid RHCs the 

higher of their reasonable costs or their BIPA PPS rate. 

32Five states—Arkansas, Idaho, Indiana, Kentucky, and Minnesota—reported using an

inflation index when calculating the base payment rate under BIPA. These states inflated

RHCs’ 1999 and 2000 costs prior to averaging them, which CMS has said is an acceptable

approach to calculating the base rate under the BIPA PPS. 

Page 16 GAO-05-452 Medicaid Payment for FQHCs and RHCs
payment rates that differed depending on the type of service provided.33

For example, Illinois RHCs received payment rates that differed depending

on whether a visit was for medical, dental, or behavioral health services. 

Table 4: Timetable for States’ Application of the MEI Inflation Index to RHCs’ BIPA 

PPS Rates 

Date MEI first applied Number of states States 

January 2001 3 North Carolina,a Oregon, and Utah 

July 2001 2 Arkansas and Oklahoma 

October 2001 15 Alabama, California, Florida, Georgia,

Idaho, Kansas, Maine, Michigan, 

Nevada, New York, Ohio, 

Pennsylvania, Tennessee, Texas, and

Virginia 

January 2002 12 Hawaii, Illinois, Indiana, Iowa, 

Kentucky, Minnesota, Mississippi, 

Montana, North Dakota, South

Dakota, Washington, and Wyoming 

July 2002 1 Louisiana 

Source: GAO analysis of state survey responses. 

a

January 2001 was the first date that North Carolina may have applied the MEI to any RHC’s BIPA

PPS rate. However, the actual date that the MEI was applied varied by RHC because the state 

calculated BIPA PPS rates on the basis of each RHC’s cost reporting year.

We identified two issues with states’ implementation of the BIPA PPS for 

FQHCs and RHCs. First, BIPA PPS rates in more than one-third of states 

may be inappropriate—these states reported that their rates did not 

include all Medicaid-covered FQHC and RHC services. These states most

commonly excluded laboratory, radiology, and dental services. These 

exclusions are inappropriate because, under BIPA and CMS guidance, the 

BIPA PPS must include all Medicaid-covered services—specifically, 

outpatient services provided in an FQHC or RHC and included in the 

state’s plan. Prescription drugs are the one service that states are allowed 

Issues with States’ 

Implementation of BIPA PPS 

 33The four states were Illinois, Maine, Minnesota, and Tennessee. 

Page 17 GAO-05-452 Medicaid Payment for FQHCs and RHCs
to exclude from the BIPA PPS rate, according to CMS.34 Thus, all other 

Medicaid-covered outpatient services provided by an FQHC or RHC must 

be paid for under the BIPA PPS. 

Second, as of June 1, 2004, over 3 years after the passage of BIPA, over 

half of states using the BIPA PPS had either not defined procedures for 

adjusting payment rates for a change in scope of services or not specified 

what would constitute such a change; states are required by BIPA to adjust

BIPA PPS rates for a change in scope of services. Specifically, according to

our survey results, 9 of the 39 states that pay FQHCs, RHCs, or both using

the BIPA PPS reported that they had not defined procedures for adjusting 

payment rates for a change in scope of services. In addition, according to 

our review of state documents, of the remaining 30 states that reported 

defining adjustment procedures for a change in scope of services, 12 did 

not specify what would constitute such a change. 

Many States Implemented 

Alternative Payment 

Methodologies, but Not All 

Met BIPA Requirements 

Approximately half of the states chose the BIPA option to use an

alternative methodology to pay at least some FQHCs, RHCs, or both, but

not all states’ methodologies met the BIPA requirements. Eighteen states 

used an alternative methodology for both FQHCs and RHCs, 6 states used 

it for FQHCs only, and 1 state used it for RHCs only. States with 

alternative methodologies generally used either a cost-based 

reimbursement methodology, similar to that used to pay FQHCs and RHCs 

prior to BIPA, or implemented an alternative PPS methodology with

features that differed slightly from the BIPA PPS. Some states’ alternative 

methodologies, however, did not meet BIPA’s requirement that alternative 

methodologies result in payments no lower than what would have been 

received under the BIPA PPS. 

 34BIPA authorized states to use an alternative methodology, but for those FQHCs and RHCs

being paid under the BIPA PPS, the state must use the BIPA PPS methodology to pay for all 

Medicaid-covered services, except for prescription drugs. Because of a special discount 

pricing program for which many FQHCs are eligible, a CMS official said that states could 

pay for prescription drugs under another method. The discount pricing program, known as

the 340B drug pricing program after the section of the Public Health Service Act in which it

is found, provides federal purchasers and certain grantees of federal agencies access to 

prescription drugs at reduced prices. 42 U.S.C. § 256b (2000). 

Page 18 GAO-05-452 Medicaid Payment for FQHCs and RHCs
Twenty-four of 51 states opted to use one or more alternative payment 

methodologies to pay at least some of their FQHCs. The type of alternative 

methodology varied by state. Specifically, to pay at least a portion of their 

FQHCs, 15 states used a cost-based reimbursement methodology, 8 states 

used an alternative PPS methodology, and 3 states used an alternative

methodology that was neither cost-based reimbursement nor a PPS; 2 of

these states used multiple methods.35 (See table 5.)

Implementation of Alternative 

Methodologies for FQHCs

Table 5: Alternative Payment Methodologies for FQHCs, as of June 1, 2004 

Alternative

methodology 

Number

of states States 

Cost-based

reimbursement 

15 Arkansas, California,a Colorado, Iowa, Kansas,b

Missouri, Nebraska, New Hampshire, North 

Carolina, South Carolina, Utah, Vermont, Virginia, 

West Virginia, and Wisconsinc

PPS 8 Alaska, Arizona, California,a Michigan, New

Jersey, New Mexico, North Dakota, and Texas 

Otherd3 Massachusetts, New York, and Wisconsinc

Source: GAO analysis of state survey responses. 

a

California had two alternative methodologies for paying FQHCs—cost-based reimbursement (only for 

Los Angeles County FQHCs participating in the county’s 1115 waiver program) and an alternative 

PPS. 

b

State had not fully implemented this methodology.

c

Wisconsin had two alternative methodologies for paying FQHCs—cost-based reimbursement and 

another methodology.

d

Other methodologies were neither purely cost-based nor alternative PPSs. 

Fifteen states used a cost-based reimbursement methodology for at least

some FQHCs. Under cost-based reimbursement, FQHCs were required to

submit cost reports, which the states reviewed to determine whether

reported costs were allowable and reasonable.36 States may set limits on 

the reasonableness of costs, and 11 of the 15 states reported setting limits 

 35California and Wisconsin each used two alternative methodologies. California paid a 

portion of FQHCs with cost-based reimbursement (Los Angeles County only) and another

portion under an alternative PPS. Wisconsin paid a portion of FQHCs using cost-based 

reimbursement and another portion with a flat rate set at the Medicare per visit limit. 

36Four states—Arkansas, California, Nebraska, and New Hampshire—reported relying on 

Medicare principles to determine allowable costs.

Page 19 GAO-05-452 Medicaid Payment for FQHCs and RHCs
for FQHCs.

37 (Table 6 lists the states using limits, by type of limit.) Some 

states used more than one limit, as follows: 

• Overall caps. Six states reported setting limits on how much they would 

reimburse for a patient’s visit, with most basing their limit on that 

employed by Medicare.38 For example, three states set their limits at the 

Medicare upper payment limit, while two states set their limits at 125 

percent and 133 percent, respectively, of the Medicare payment limit. 

• Performance or productivity standards. Seven states limited

reasonable costs by setting performance or productivity standards. These 

states stipulated the number of visits per year that a full-time-equivalent 

physician should provide; they used similar guidelines for other 

practitioners. Again, most of the states using performance or productivity 

standards relied on the guidelines specified by Medicare.39

• Limits on administrative costs. Three states reported that they 

disallowed administrative costs exceeding 30 percent of total costs.

 37Four states—Arkansas, California, Nebraska, and Utah—did not report the use of any 

specific limits in determining reasonable costs.

38In 2004, the Medicare upper payment limit was $106.58 per visit for urban FQHCs and 

$91.64 per visit for rural FQHCs.

39For example, Medicare guidelines specify that a full-time-equivalent physician employed

by the FQHC should provide at least 4,200 visits per year. 

Page 20 GAO-05-452 Medicaid Payment for FQHCs and RHCs
Table 6: States That Used Limits in Determining Reasonable Costs for FQHCs 

under Cost-Based Reimbursement Alternative Methodologies, by Type of Limit, as 

of June 1, 2004 

Statea

Cap or upper

payment limit

Performance or

productivity

standard

Limit on administrative 

costs 

ColoradobX

Iowa X

Kansas X X

Missouri X

New Hampshire X 

North Carolina X X 

South Carolina X X 

Vermont X

Virginia X X

West Virginia X X 

Wisconsin X

Total 6 7 3

Source: GAO analysis of state survey responses. 

a

Four states—Arkansas, California, Nebraska, and Utah—did not report the use of any specific limits

in determining reasonable costs.

b

Colorado pays an FQHC the lower of the FQHC’s current year of costs or a 3-year average of costs.

Eight states had an approved alternative PPS for reimbursing at least a 

portion of their FQHCs. Generally, these alternative PPSs differed from the 

BIPA PPS in that they used a different base payment rate, a different 

inflation factor, or both. For example, California set its alternative PPS 

base rate at an FQHC’s 2000 reasonable costs, as opposed to an average of

1999 and 2000 reasonable costs, which is stipulated under the BIPA PPS; 

Alaska used an inflation index developed by Data Resources Incorporated 

instead of the MEI to adjust rates. Arizona plans to rebase its alternative 

PPS every 3 years, calculating the base rate as the average of costs from

the 2 previous years. Arizona also inflated rates using the physician

services component of the Consumer Price Index (CPI). Table 7 provides 

the characteristics of the eight states’ alternative PPS methodologies for 

FQHCs.

Page 21 GAO-05-452 Medicaid Payment for FQHCs and RHCs
Table 7: Characteristics of Alternative PPSs for FQHCs, by State, as of June 1, 2004 

State Base rate Inflation factor Other components 

Alaska The inflated average of fiscal years’ 1999 and 

2000 reasonable costs (inflated to fiscal year

2002). 

Inflation index developed by Data 

Resources Incorporated.

Not applicable. 

Arizona The average of the 2 previous years’ costs 

inflated to the current year. 

Physician services component of 

the CPI. 

Rate is rebased every 3 years.

California Fiscal year 2000 reasonable costs inflated to

fiscal year 2001 by the MEI. 

MEI. Not applicable.

Michigan Fiscal years’ 1999 and 2000 costs, converted to 

calendar year, then averaged and inflated to the 

calendar year 2001 midpoint by the MEI and 

compared to the state’s Medicaid payment limit 

(the Medicare per visit payment limit plus 

$17.41). If costs are greater than the Medicaid

payment limit, then the base rate is the Medicaid

payment limit plus 66.6 percent of costs above 

the Medicaid limit. 

If the base rate is less than the

Medicaid limit, then it is inflated

by the MEI; if the base rate is

greater than the Medicaid limit, 

then the rate is inflated by the 

MEI plus a sliding scale

percentage of the difference 

between the limit and the 

FQHC’s calendar year 2001

costs.

Not applicable. 

New Jersey The greater of the fiscal year 1999 or 2000 final 

settled costs based on the FQHC’s Medicaid

cost report.

MEI. Not applicable.

New Mexico The average of fiscal years’ 1999 and 2000 

reasonable costs. 

State chooses between the MEI 

or the CPI for urban consumers, 

but adjustments can be no less

than that provided by the MEI. 

Not applicable. 

North Dakota The lesser of the fiscal year 2000 reasonable 

costs or the maximum Medicare rate per visit for

fiscal year 2000. 

State-determined, but cannot 

exceed the MEI. 

Not applicable. 

Texas The average of fiscal years’ 1999 and 2000 

reasonable costs. 

MEI + 1.5 percent. If an FQHC’s costs increase 

more than the inflation factor, 

then it can request an

adjustment equal to 100 percent 

of costs if the FQHC can show

that it is operating in an efficient 

manner or that the increase is

due to a change in scope of

services.

Source: GAO analysis of state survey responses. 

Note: For the purpose of comparison, the BIPA-specified PPS rate for each FQHC would (1) use the 

average of fiscal years’ 1999 and 2000 reasonable costs per visit as the base rate, (2) use the MEI as

the annual inflation factor, and (3) be adjusted as necessary for a change in scope of services.

Page 22 GAO-05-452 Medicaid Payment for FQHCs and RHCs
Three states created alternative payment methodologies that were neither 

purely cost-based nor an alternative PPS. Specifically, Massachusetts paid 

most FQHCs the same rate, which was based on the 1998 costs from a 

sample of FQHCs in the state.40 New York paid some FQHCs on the basis 

of diagnosis,

41 and Wisconsin paid two of its FQHCs a flat rate set at the 

Medicare upper payment limit. 

Almost half of the states with RHCs (19 of 44 states) paid at least a portion 

of their RHCs using an alternative methodology. Twelve states paid at least

a portion of their RHCs using a cost-based reimbursement methodology, 6 

states created an alternative PPS methodology, and 3 states paid at least

some RHCs by an alternative methodology that was neither cost-based 

reimbursement nor a PPS. Two states—New Hampshire and Wisconsin—

used both cost-based reimbursement and another payment methodology. 

(See table 8.) 

Implementation of Alternative 

Methodologies for RHCs

 40Massachusetts’s FQHCs agreed to a class rate payment system whereby most FQHCs

received the same payment rates. The payment rates, which vary by service, were based on 

an analysis of the 1998 cost reports submitted by 25 FQHCs, which represented 

approximately 75 percent of the FQHCs in the state. After applying reasonableness tests, 

such as a limit on administrative costs and productivity standards, the state determined a 

unit cost for each of the 25 FQHCs sampled, which was inflated by a state-specific inflation 

factor. The final payment rate was the average of the rates for these 25 FQHCs. In July

2004, the payment rate was increased 13.7 percent to reflect a cumulative adjustment for

inflation. The remaining 3 FQHCs, all of which were hospital-affiliated, were paid using an

outpatient hospital payment methodology. 

41New York’s alternative methodology consists of 71 preset rates that correspond to

outpatient diagnostic categories. Five FQHCs in the state selected this payment option. 

Page 23 GAO-05-452 Medicaid Payment for FQHCs and RHCs
Table 8: Alternative Payment Methodologies for RHCs, as of June 1, 2004 

Alternative

methodology 

Number

 of states States 

Cost-based

reimbursement 

12 Georgia, Iowa, Kansas,a Missouri, Nebraska, 

New Hampshire,

b

 North Carolina, South 

Carolina, Vermont, Virginia, West Virginia, and 

Wisconsinc

PPS 6 Alaska, Arizona, California, New Mexico, North

Dakota, and Texas 

Otherd3 Colorado, New Hampshire,b and Wisconsinc

Source: GAO analysis of state survey responses. 

a

The state had not fully implemented this methodology.

b

New Hampshire had two alternative methodologies for paying RHCs—cost-based reimbursement

and another methodology.

c

Wisconsin had two alternative methodologies for paying RHCs—cost-based reimbursement and 

another methodology.

d

Other methodologies were neither purely cost-based nor alternative PPSs.

Twelve states used cost-based reimbursement to pay at least some RHCs 

and most applied limits when determining reasonable costs (see table 9). 

• Overall caps. Ten states reported applying limits on how much they 

would reimburse for a patient’s visit. All 10 states set their limit at the 

Medicare upper payment limit for RHCs, which was $68.65 in 2004.42

• Performance or productivity standards. Seven states limited

reasonable costs by setting performance or productivity standards and all 

relied on the standards employed by Medicare. 

• Limits on administrative costs. No state reported setting limits on 

administrative costs. 

 42In Medicare, RHCs based in hospitals with fewer than 50 beds are eligible to receive an 

exception to the Medicare per visit payment limit. State Medicaid programs often 

incorporate this exception into their payment methodologies.

Page 24 GAO-05-452 Medicaid Payment for FQHCs and RHCs
Table 9: States That Used Limits in Determining Reasonable Costs for RHCs under 

Cost-Based Reimbursement Alternative Methodologies, by Type of Limit, as of 

June 1, 2004 

Statea

Cap or upper payment limit

Performance or productivity

standard

Georgia X

Iowa X

Kansas X X

Missouri X X

New Hampshire X 

North Carolina X X 

South Carolina X X 

Vermont X

Virginia X X

West Virginia X X 

Wisconsin X

Total 10 7

Source: GAO analysis of state survey responses. 

Note: No state reported applying limits on administrative costs.

a

Nebraska did not report the use of any specific limits in determining reasonable costs.

Six states had an approved alternative PPS for reimbursing at least a 

portion of their RHCs. One state used a base rate that was different from

the BIPA PPS, two states either used or reserved the option to use an 

inflation index other than the MEI, and two states did both. For example, 

in Arizona, the state plans to rebase its alternative PPS every 3 years and 

inflate interim years’ rates by a component of the CPI. The sixth state 

(Texas) used an alternative PPS that was virtually the same as the BIPA 

PPS except that RHCs did not have to return to the state any 

overpayments that might have occurred during the transition to the new

Page 25 GAO-05-452 Medicaid Payment for FQHCs and RHCs
payment system.

43 See table 10 for details on the six states’ alternative PPS 

for RHCs. 

Table 10: Characteristics of Alternative PPSs for RHCs, by State, as of June 1, 2004 

State Base rate Inflation factor Other components 

Alaska The inflated average of fiscal years’ 1999 and 2000 

reasonable costs (inflated to fiscal year 2002). 

Inflation index developed by 

Data Resources

Incorporated. 

Not applicable. 

Arizona The average of 2 previous years’ costs inflated to 

the current year. 

Physician services 

component of the CPI. 

Rate is rebased every 3 years.

California Fiscal year 2000 reasonable costs inflated to fiscal 

year 2001 by the MEI. 

MEI. Not applicable.

New Mexico The average of fiscal years’ 1999 and 2000 

reasonable costs. 

State chooses between the 

MEI or the CPI for urban 

consumers, but adjustments 

can be no less than that

provided by the MEI. 

Not applicable. 

North Dakota Provider-based RHCs: 100 percent of billed

charges in fiscal year 2000. 

Independent RHCs: fiscal year 2001 Medicare 

upper payment limit. 

State-determined factor not 

to exceed the MEI. 

Not applicable. 

Texas The average of fiscal years’ 1999 and 2000 

reasonable costs. 

MEI. RHCs did not have to pay back

any overpayments at settlement 

from old cost-based rate. 

Source: GAO analysis of state survey responses. 

Note: For the purpose of comparison, the BIPA-specified PPS rate for each RHC would (1) use the 

average of fiscal year’s 1999 and 2000 reasonable costs per visit as the base rate, (2) use the MEI as

the annual inflation factor, and (3) be adjusted as necessary for a change in scope of services.

Three states reported that their alternative payment methodologies were 

neither purely cost-based reimbursement nor an alternative PPS. 

Specifically, most RHCs in Wisconsin were paid the Medicare upper 

payment limit, and all RHCs in Colorado were paid the Medicare upper 

payment limit or their Medicare rate if the upper payment limit did not

 43Between the time that the BIPA requirements were to be effective and the time that Texas

implemented its PPS, the state paid RHCs using an interim payment methodology. When its

alternative PPS was implemented, the state conducted a reconciliation process to account

for differences in the reimbursement under the interim system and what RHCs would have

received under the BIPA PPS. While RHCs under the BIPA PPS had to reimburse the state

if the settlement process found that the interim payments exceeded what would have been

paid under the BIPA PPS, RHCs selecting the alternative PPS did not have to return any

overpayments to the state, if they had occurred. 

Page 26 GAO-05-452 Medicaid Payment for FQHCs and RHCs
apply.44 In New Hampshire, hospital-based RHCs were paid approximately 

92 percent of allowable charges, which were determined on the basis of 

the RHCs’ Medicare cost reports. 

Not all states ensured that their alternative methodologies resulted in

payments that were at least equal to what FQHCs and RHCs would have 

received under the BIPA PPS, as required by statute. Under BIPA, states

may use an alternative payment methodology only if the methodology 

results in payment to an FQHC or RHC that is at least equal to what the 

FQHC or RHC would have received under the BIPA PPS and if the FQHC 

or RHC agrees to its use. Of the 25 states with alternative methodologies 

for either FQHCs, RHCs, or both, 4 states (Missouri, New Hampshire,

Vermont, and Wisconsin) paid at least some providers less than what they 

would have been paid under the BIPA PPS and it was unclear whether the 

alternative payment methodologies in 2 states (Nebraska and North 

Carolina) resulted in payments at least equal to what the FQHCs and RHCs 

would have received under the BIPA PPS.45

Issue with States’ 

Implementation of Alternative 

Methodologies

Four states’ alternative methodologies paid at least some FQHCs, RHCs, or

both less than what they would have received under the BIPA PPS, but the 

states continued to pay the providers the lower rate under the alternative 

methodology. Missouri determined whether its alternative methodology 

paid at least as much as the BIPA PPS for only a portion of its FQHCs and 

RHCs and did so only for the first year of the methodology.46 On the basis

of this assessment, Missouri found that over half of the FQHCs reviewed 

and about 40 percent of the RHCs reviewed would fare better under the 

BIPA PPS, yet the state continued to pay them under the alternative 

methodology.47 In 2001, the FQHCs and RHCs that would have fared better 

under the BIPA PPS would have received on average about $12 more and 

 44The Medicare upper payment limit does not apply to RHCs based in hospitals with fewer

than 50 beds. 

45The remaining 19 states reported they had determined that their alternative 

methodologies resulted in payment rates at least equal to what FQHCs and RHCs would

have received under the BIPA PPS. 

46Missouri made the determination for fewer than half of its FQHCs and one-third of its

RHCs, which represented those providers for which the state had audited cost reports from

fiscal year 1999 through 2001.

47The state contends that, in the aggregate, FQHCs and RHCs are better off under the 

alternative methodology compared with the BIPA PPS. BIPA, however, requires that each

FQHC and each RHC receive payment at least equal to that under the BIPA PPS. 

Page 27 GAO-05-452 Medicaid Payment for FQHCs and RHCs
about $25 more per visit, respectively. New Hampshire compared only the 

fiscal year 2001 BIPA PPS rates for its FQHCs and RHCs with the costbased rates; although the state found that the BIPA PPS rates were higher 

for some RHCs, a state official told us in October 2004 that the state had 

not reimbursed these providers for the difference. Vermont only

determined the 2001 BIPA PPS rates for its FQHCs and RHCs.48 On the 

basis of those rates, we estimated the 2002 and 2003 BIPA PPS rates for 

Vermont’s FQHCs and RHCs and found that some RHCs would likely have 

fared better under the BIPA PPS.49 However, the state reported that all 

FQHCs and RHCs were paid under the alternative methodology. Wisconsin

compared the fiscal year 2001, 2002, and 2003 BIPA PPS rates for its 

FQHCs and RHCs with the cost-based rates used for those fiscal years and 

found that an RHC would have fared better under the BIPA PPS each year, 

yet Wisconsin continued to pay that RHC under the alternative 

methodology. Specifically, across the 3 years, the BIPA PPS rate would 

have paid that RHC, on average, about $20 more per visit compared with 

the state’s alternative methodology. Since these states did not routinely 

inform all FQHCs and RHCs of what their BIPA PPS rates would have

been, the FQHCs and RHCs may have been unaware that some providers, 

including themselves, may have fared better under the BIPA PPS. 

For the remaining two states, it was unclear whether their alternative 

payment methodologies complied with the requirement that alternative 

methodologies must result in payments at least equal to what the FQHCs 

and RHCs would have received under the BIPA PPS. Nebraska did not

determine whether its alternative methodology paid at least as much as

the BIPA PPS.50 North Carolina compared its payment rates under its 

alternative methodology with preliminary BIPA PPS rates only for the base

year (fiscal year 2001) and not for any subsequent years. As of March 2005, 

the state had not finalized all FQHCs’ and RHCs’ 2001 BIPA PPS rates, and 

 48According to a state official, Vermont provided each FQHC and RHC with its 2001 BIPA

PPS rate. The state did not determine future years’ BIPA PPS rates but left this

responsibility to the individual providers. 

49We estimated the 2002 and 2003 BIPA PPS rates for Vermont’s FQHCs and RHCs by

inflating the 2001 BIPA PPS rates for each FQHC and RHC by the MEI, the annual inflation

adjustment required by BIPA. On the basis of our analysis of 2001, 2002, and 2003 costbased and BIPA PPS rates, we determined that some RHCs would have, on average,

received about $3 more per visit in certain years had they been paid under the BIPA PPS. 

50According to a state official, Nebraska will compare the payment rates under the

alternative methodology to BIPA PPS rates. The official did not indicate when such a

comparison would be made. 

Page 28 GAO-05-452 Medicaid Payment for FQHCs and RHCs
it is therefore unclear whether the state’s alternative methodology resulted 

in payment that was at least as much as the BIPA PPS would offer.51

Sufficient evidence is not available to determine whether there is a need to 

rebase or refine the BIPA PPS. Concerns exist about the appropriateness 

of the MEI, which was specified in the statute as the index used to 

annually adjust BIPA PPS rates for inflation. For example, the MEI does 

not reflect the costs of the services typically provided by FQHCs and 

RHCs. Other indexes often used to reflect medical care inflation, however,

have a similar shortcoming. Although the MEI may not be an appropriate 

index to adjust BIPA PPS rates, based on our research no inflation index is

currently available that reflects FQHC and RHC services. The ability to 

determine the need for rebasing or refining is further complicated by an 

increasing lack of comprehensive and current cost data because many

states no longer require all FQHCs and RHCs to submit Medicaid cost

reports. Our analysis of cost-based and BIPA PPS rates from selected 

states that used cost-based reimbursement as an alternative payment 

methodology did not provide conclusive evidence on the need to rebase or

refine the BIPA PPS. 

Our prior work, discussions with stakeholders, and our analysis for this

report raised questions about the appropriateness of the MEI as the index 

to annually adjust BIPA PPS rates for inflation. The MEI is designed to

estimate the increase in the total costs for the average physician to operate

a medical practice for the purpose of updating physician payment rates 

under Medicare.52 As such, the MEI is intended to be an equitable measure 

of cost changes associated with physician time and operating expenses. 

Evidence to Date Is 

Insufficient about the 

Need to Rebase or 

Refine the BIPA PPS 

MEI May Not Be an 

Appropriate Index to

Adjust BIPA PPS Rates for 

Inflation 

We reported in 2001 that the MEI increased at a lower rate than indexes

some states had used previously to adjust payment rates for FQHCs.53

 51According to a state official, North Carolina intends to compare the payment rates under

the alternative methodology to final BIPA PPS rates once they are determined. If the state

finds that the BIPA PPS would have paid a higher rate, it plans to pay the FQHCs and RHCs

the difference in the rates. 

52The MEI is calculated annually by CMS and is also used to annually increase the Medicare

upper payment limit for FQHCs and RHCs. 

53Our prior report contained an analysis of the indexes used by four states that previously 

set prospective rates for FQHCs using a prior year’s costs updated for inflation. The

indexes used by each of these four states grew faster than the MEI. See GAO-01-577. 

Page 29 GAO-05-452 Medicaid Payment for FQHCs and RHCs
Since the MEI adjustment is the only automatic update of BIPA PPS 

rates,

54 an FQHC’s or RHC’s ability to manage under the BIPA PPS depends 

on its initial payment rate as well as its ability to hold cost growth at or

below the MEI. 

Some stakeholders we contacted expressed concern about the use of the 

MEI to update BIPA PPS payments to FQHCs and RHCs. Officials from the 

National Association of Community Health Centers told us that the MEI 

was not an adequate measure of FQHCs’ increasing costs. These officials 

pointed to data from the Uniform Data System (UDS), a database of selfreported FQHC data, which suggested that the MEI increased at a lower 

rate than FQHCs’ costs. Specifically, the data showed that FQHCs’ total 

costs per patient encounter increased approximately 5 to 6 percent 

annually between 2001 and 2003, while the MEI increased about 2 to 

3 percent annually during the same time period.55 This concern was echoed 

by officials we spoke with from FQHCs and RHCs and by CMS officials 

from four regional offices. For example, an official from a Florida FQHC 

reported that his center’s costs over the past 3 years had increased by 

4.5 to 7 percent a year, while an official from a Florida RHC reported cost 

increases of over 10 percent annually. An important objective of a PPS, 

however, is to encourage efficiency, so equivalent increases in a provider’s

payment adjustments and its cost trends may not be desirable.

The MEI may not be an ideal index to adjust FQHCs’ and RHCs’ payment 

rates for inflation, but other indexes often used to reflect medical care 

inflation also have a similar shortcoming. As mentioned earlier, the MEI

was designed to measure the changing costs for the average physician. 

However, FQHCs’ and RHCs’ costs may not be comparable to those of the 

average physician. FQHCs provide additional services, including enabling

services (such as outreach and translation), and a significant portion of

RHC services may be provided by nonphysician practitioners. Like the 

MEI, four other indexes commonly used to reflect changes in medical care 

inflation do not reflect the services typically provided by FQHCs and 

RHCs. The 2001 to 2003 cumulative increase for the MEI was greater than 

the cumulative increases of the Producer Price Index (PPI) for Physician 

Offices and the CPI for Urban Consumers for the same period, although 

neither of the latter indexes reflect the same services provided by FQHCs 

 54BIPA also required that payments to FQHCs and RHCs be adjusted in the event of a 

change in scope of services; however, these adjustments are not automatic.

552002 and 2003 UDS data. 

Page 30 GAO-05-452 Medicaid Payment for FQHCs and RHCs
and RHCs.

56 The cumulative increase for the MEI was less than the 

cumulative increases for two other indexes—the PPI for General Medical 

and Surgical Hospitals and the CPI for Medical Care—but the latter two 

indexes included a set of hospital-related services that for the most part

neither FQHCs nor RHCs provided. (See table 11 for a comparison of these 

indexes.) 

Table 11: Percentage Increase of the MEI Compared to Increases for Other Indexes 

Commonly Used to Adjust for Medical Care Inflation (2001 to 2003) 

Percentage increase 

Index 2001 2002 2003

Cumulative

increase

Average 

increase

PPI for Physician Offices 2.85 0.00 1.51 4.36 1.45

CPI for Urban Consumers 2.85 1.58 2.28 6.71 2.24

MEI 2.10 2.60 3.00 7.70 2.57

PPI for General Medical and 

Surgical Hospitals 3.01 3.65 5.79 12.45 4.15

CPI for Medical Care 4.60 4.69 4.03 13.32 4.44

Source: GAO analysis of Bureau of Labor Statistics and CMS data. 

On the basis of our review of literature on medical care indexes and 

information from organizations typically involved in developing and 

updating these indexes, we determined that no inflation index has been 

developed specifically to reflect FQHC and RHC services. Other PPSs, 

however, often incorporate an inflation index specifically designed to 

reflect changes in the cost of services provided by or the price of 

resources used by the providers paid under that PPS. For example, under 

the Medicare home health PPS, the payment rate is inflated using a home 

health market basket that measures the changes in the prices of goods and

services bought by home health agencies. CMS has similarly developed 

update factors for Medicare payment rates for outpatient hospitals and 

skilled nursing facilities (see app. II). 

 56Although it is used to reflect inflationary changes in medical care, the CPI for Urban 

Consumers also includes many services unrelated to medical care, such as food and 

housing. 

Page 31 GAO-05-452 Medicaid Payment for FQHCs and RHCs
The lack of a Medicaid cost-reporting requirement for FQHCs and RHCs 

makes it difficult to determine the need to rebase or refine the BIPA PPS. 

Under BIPA, state Medicaid programs were no longer required to collect 

cost reports from FQHCs and RHCs, which was how states had previously 

collected cost data to help set Medicaid payment rates for these 

providers.57 The decision to collect Medicaid cost data via cost reports or 

other methods was therefore left to each individual state. In response to 

our survey, many states reported they did not require cost reports from all

FQHCs and RHCs (see table 12). Twenty-one of 51 states (over 40 percent) 

reported not requiring cost reports from all FQHCs. Specifically, 2 states 

reported no longer requiring any cost reports and another 19 states

reported requiring cost reports from some FQHCs, generally only from

new FQHCs or those with a change in scope of services. Even fewer states 

reported requiring cost reports from RHCs. Of the 44 states with RHCs, 22

(50 percent) reported not requiring cost reports from all RHCs—9 states 

did not require any RHCs to submit cost reports and 13 states only 

required cost reports from some. States that had implemented the BIPA 

PPS were especially likely to not have cost-reporting requirements: 20 of

the 33 states using the BIPA PPS for FQHCs (over 60 percent) reported not 

requiring cost reports from all FQHCs and 19 of the 33 states using the 

BIPA PPS for RHCs (approximately 58 percent) reported not requiring 

cost reports from all RHCs. Without comprehensive and current cost data, 

determining whether there is a need to rebase or refine the BIPA PPS is

difficult, if not impossible. 

Lack of Cost-Reporting 

Requirement Hinders

Ability to Determine the

Need to Rebase or Refine 

the BIPA PPS 

 57Medicare requires FQHCs and RHCs to submit annual cost reports, but Medicare does not 

cover the same set of services as Medicaid. Furthermore, while some states obtain copies

of the Medicare cost reports, others do not. 

Page 32 GAO-05-452 Medicaid Payment for FQHCs and RHCs
Table 12: States’ Cost Reporting Requirements for FQHCs and RHCs, as of June

2004 

Type of 

provider

Required to submit 

cost reports Number of states 

Number of states

using the BIPA PPSa

FQHCs All 30 13

At least some, but not all 19 18

None 2 2

Total 51 33

RHCs All 22 14

At least some, but not all 13 12

None 9 7

Total 44b33

Source: GAO analysis of state survey responses. 

a

The 33 states that used the BIPA PPS were not the same for both FQHCs and RHCs.

b

According to states’ survey responses, there are no RHCs in Connecticut, Delaware, the District of

Columbia, Maryland, Massachusetts, New Jersey, and Rhode Island.

Analysis of Rates from 

Selected States Provided 

Inconclusive Evidence on 

the Need to Rebase or

Refine the BIPA PPS 

Our comparison of cost-based and BIPA PPS rates for FQHCs and RHCs 

from selected states provided inconclusive evidence concerning the need 

to rebase or refine the BIPA PPS. From 2001 through 2003, most FQHCs’

and RHCs’ cost-based rates exceeded their BIPA PPS rates in the four 

states we reviewed—Iowa, Vermont, Virginia, and Wisconsin.58 Within

these four states, cost-based rates, on average, were greater than the BIPA 

PPS rates for 41 of the 45 FQHCs and 128 of the 163 RHCs included in the 

analysis. However, the extent of the difference between cost-based and 

PPS rates varied considerably both within and among the states reviewed 

(see fig. 3). For example, among the 15 Wisconsin FQHCs we analyzed, 

cost-based rates across the 3-year period ranged from approximately 30 

percent less than to approximately 70 percent more than BIPA PPS rates.59

For the 104 Iowa RHCs we analyzed, cost-based rates ranged from

approximately 35 percent less than to approximately 82 percent more than 

 58We were unable to compare the rates in states that paid FQHCs and RHCs only under the 

BIPA PPS because many of these states no longer required cost reports and the states were

no longer required to determine cost-based rates.

59Over the same time period, the average difference between cost-based and BIPA PPS 

rates for FQHCs in Wisconsin was about $20 per visit. Cost-based rates per visit ranged

from about $140 less than BIPA PPS rates to about $166 greater than BIPA PPS rates.

Page 33 GAO-05-452 Medicaid Payment for FQHCs and RHCs
BIPA PPS rates.60 Because the FQHCs and RHCs included in our analysis 

were paid cost-based rates, they may have had less incentive to operate

efficiently than if they had been paid under the BIPA PPS.61 However, it is

unclear whether the difference between cost-based and PPS rates may be 

attributed to this possible lack of incentive or if these providers were 

operating efficiently but their costs remained higher than what the BIPA 

PPS would pay. Given these unknowns and the variability in the extent of

rate differences, the fact that BIPA PPS rates were generally less than

these providers’ cost-based rates is not compelling evidence that BIPA PPS 

rates need to be rebased or refined at this time. 

 60Over the same time period, cost-based rates for RHCs in Iowa were, on average, $4 per

visit more than BIPA PPS rates. Cost-based rates per visit ranged from about $48 less than

BIPA PPS rates to about $57 greater than BIPA PPS rates. 

61Cost-based payment methods have been criticized because increases in costs result in 

increased payments, thus weakening providers’ incentives for efficiency. Under a PPS, cost

increases would not necessarily result in an increase in payment because payment is not

contingent on an individual provider’s actual cost of delivering care. See, for example, 

Medicare Payment Advisory Commission, Report to the Congress: Medicare Payment 

Policy (Washington, D.C.: March 1999).

Page 34 GAO-05-452 Medicaid Payment for FQHCs and RHCs
Figure 3: Percentage Difference in Cost-Based and BIPA PPS Rates, by State and 

Provider Type, 2001 through 2003 

FQHCs RHCs

Iowa (n=15)

Vermont (n=2)

Virginia (n=13)

Wisconsin (n=15)

Iowa (n=104)

Vermont (n=14)

Virginia (n=31)

Wisconsina (n=14)

Source: GAO analysis of state data.

State’s minimum and maximum percentage difference between cost-based and BIPA PPS rates

State’s average percentage difference between cost-based and BIPA PPS rates

Above zero, costbased rates are 

greater than BIPA 

PPS rates.

At zero, costbased rates equal 

BIPA PPS rates.

Below zero, costbased rates are 

less than BIPA 

PPS rates.

Percentage difference

400%

375%

100%

50%

0%

-50%

-75%

125%

75%

25%

-25%

a

The change in the organizational structure of one RHC in Wisconsin resulted in a large difference

between its cost-based and BIPA PPS rates, which is reflected as the maximum percentage 

difference for RHCs in the state.

Page 35 GAO-05-452 Medicaid Payment for FQHCs and RHCs
CMS guidance to states and regional offices and its oversight of states’

implementation of the new BIPA-mandated payment requirements for 

FQHCs and RHCs did not ensure consistent state compliance with the law.

CMS guidance did not adequately address certain BIPA requirements and 

thus uncertainties exist about whether and how some requirements for 

BIPA compliance have been implemented, such as states’ methodologies 

to adjust BIPA PPS rates to account for any change in scope of services. 

Since CMS initially approved states’ plans to implement BIPA’s Medicaid 

payment provisions for FQHCs and RHCs, its oversight of states’ 

implementation has been limited. CMS has relied on states’ assurances

that they were in compliance with BIPA and investigated payment issues 

only in response to complaints, which CMS said were rare, or when 

concerns were identified during a CMS review conducted for other 

purposes. As a result, CMS was unaware of certain compliance issues, 

including that some states’ BIPA PPS rates and alternative methodologies 

were inconsistent with the law. 

CMS’s guidance to its regional offices and the states did not adequately 

address certain BIPA requirements and thus did not ensure that states had 

enough information to develop payment systems that were consistent with

BIPA. CMS provided its regional offices and states with preliminary 

information regarding the new payment requirements for FQHCs and 

RHCs within the first 3 months following the enactment of BIPA; however, 

the regional offices did not use all of this information consistently.

62 (Fig. 4 

provides the timeline of the issuance of CMS guidance.) On January 19, 

2001, CMS issued a letter to state Medicaid directors summarizing BIPA’s

new FQHC and RHC payment provisions, but the letter provided no 

interpretation of the legislation or clarification as to how CMS expected 

states to implement the new payment provisions. The letter also instructed

states to submit SPAs that conformed to the BIPA requirements before the 

end of the first calendar quarter of 2001 (March 31, 2001). To assist states

in meeting this deadline, CMS provided regional offices with standard 

BIPA-compliant SPA language on March 9, 2001. According to CMS, prior 

to approving the SPAs, the regional offices were to work with each state to 

ensure that the SPA reflected the specifics of the state’s payment 

methodology. While most of CMS’s 10 regions followed this protocol, 1 

region approved the SPAs for its six states even though most of these 

CMS Guidance and 

Oversight Did Not 

Ensure Consistent 

State Compliance 

with BIPA 

CMS Guidance Did Not 

Adequately Address 

Certain BIPA

Requirements 

 62As of March 2005, CMS had not issued regulations regarding states’ implementation of

BIPA’s new payment requirements for FQHCs and RHCs. 

Page 36 GAO-05-452 Medicaid Payment for FQHCs and RHCs
SPAs still contained only the standard language initially provided by CMS. 

These SPAs indicated that states intended to conform to BIPA, but most

contained no details as to how each state planned to implement the new

payment system. Although these states reported to us in response to our 

survey the details of how they were paying FQHCs and RHCs, CMS did not 

require these states to update their SPAs. As a result, CMS did not have an 

official record detailing how FQHCs and RHCs were paid in most of the 

states in this region. 

Figure 4: Timeline Showing CMS’s Issuance of Guidance and Approval of States’ Plans to Implement BIPA’s Medicaid 

Payment Provisions 

Source: GAO analysis of CMS data.

Dec. 21, 2000: Enactment of the BIPA legislation

Jan. 1, 2001: Effective date of BIPA's Medicaid payment provisions

Jan. 19, 2001: CMS informed state Medicaid directors of BIPA's Medicaid payment provisions by letter

Mar. 31, 2001: CMS deadline for submittal of state plan amendments

Apr. 13, 2001: CMS provided its regional offices with suggested state plan amendment 

 review guidelines by e-mail

Number of state plan 

amendments submitted 

by or after CMS's 

deadline

By 

Mar. 31, 2001:

50 states

After 

Mar. 

31, 

2001:

1 state

Cumulative number of CMS-approved state plan amendments by selected datesa

By June 30, 

2001:

23 states

By Sept. 12, 2001:

29 states

By Dec. 31, 2001:

48 states

By Apr. 30, 2002:

51 states

Sept. 12, 2001: CMS issued Question and Answer guidance

Mar. 9, 2001: CMS provided its regional offices with standard state plan amendment language by e-mail

Dec.

2000

Jan.

2001

Feb.

2001

Mar.

2001

Apr.

2001

May

2001

June

2001

July

2001

Aug.

2001

Sept.

2001

Oct.

2001

Nov.

2001

Dec.

2001

Jan.

2002

Feb.

2002

Mar.

2002

Apr.

2002

a

A state is included in the count if CMS approved the state plan amendment for both FQHC and RHC 

payment by the date noted.

While CMS later provided the states and regional offices with more 

detailed guidance, this guidance was issued after many states’ SPAs were 

submitted and approved. On April 13, 2001, 2 weeks after the deadline for 

SPA submission, a CMS official provided regional office staff with 

Page 37 GAO-05-452 Medicaid Payment for FQHCs and RHCs
suggested SPA review guidelines by e-mail. By the time this guidance was 

provided, all states had submitted their SPAs and CMS had approved 2 

states’ SPAs. The April 2001 guidance outlined key points that each SPA 

was to include to ensure compliance with BIPA. For example, the 

guidance recommended that each SPA explain the averaging methodology 

used to determine the base PPS rate.63 Additional guidance from CMS was

not issued until 5 months later, by which time 57 percent of SPAs (SPAs 

for 29 of 51 states) had been approved. Specifically, on September 12, 

2001, CMS sent a Question and Answer document to regional office 

administrators, who were instructed to provide the guidance to states. 

This document provided the most comprehensive guidance to date and 

answers to commonly asked questions about BIPA, including what

services should be included in the BIPA PPS rate, ongoing requirements

for the collection and review of cost reports, and the development of BIPA 

PPS rates for new centers and clinics. 

CMS guidance overall left some requirements for compliance with BIPA 

unclear, particularly with regard to the adjustment of BIPA PPS rates due 

to a change in scope of services. Although CMS has defined a change in

scope of services as one that affects the type, intensity, duration, and 

amount of services, it has not clearly defined these elements or developed 

further guidance regarding how change in scope of service adjustments 

should be applied. As a result, at the time of our survey, over one-half of 

the 39 states using the BIPA PPS had either not defined procedures for 

adjusting FQHCs’ and RHCs’ BIPA PPS rates for a change in scope of

services or not specified what would constitute such a change. Among 

states with defined procedures, definitions of what constituted a change in

scope of services varied considerably and several included factors that are

not directly related to the provision of services. For example, 

documentation from 5 of these states specified relocation, remodeling, the 

opening of a new site, or a combination of these as criteria to adjust the 

BIPA PPS rate under this provision. However, CMS told us that factors 

such as relocation do not constitute a change in scope of services unless 

there is a corresponding change in the type, intensity, duration, or amount

of services. Furthermore, CMS has not offered guidance regarding the 

requirement for states to adjust base BIPA PPS rates of FQHCs and RHCs 

that are paid under an alternative payment methodology in the event of a 

 63The guidance also included recommendations that each SPA contain language stating that

the plan conforms to the provisions of BIPA, specify when the MEI would be applied to 

update the PPS rates, describe the methodology used to reimburse FQHCs and RHCs

participating in Medicaid managed care, and define the state’s use of the term fiscal year. 

Page 38 GAO-05-452 Medicaid Payment for FQHCs and RHCs
change in scope of services. If BIPA PPS rates are not appropriately 

adjusted for a change in scope of services, states cannot accurately 

compare payments under those rates to payments under an alternative 

methodology to ensure payment that is at least equal to the payment under

the BIPA PPS, as BIPA required. 

CMS Oversight Has Been 

Limited 

CMS oversight of states’ Medicaid payment systems for FQHCs and RHCs

has been limited since the approval of the SPAs. CMS officials explained 

that they have relied upon states’ assurances that they are in compliance 

with BIPA and have not asked states to provide supporting documentation

to verify their compliance with the new payment requirements. For

example, CMS has not required states using an alternative payment 

methodology to provide evidence that payment was at least equal to what

would have been paid under the BIPA PPS. Additionally, CMS officials 

stated that they would only initiate reviews of FQHC and RHC payment 

issues in response to a complaint or if an issue was identified during a

CMS review conducted for other purposes. Regional office officials 

reported rarely receiving complaints about Medicaid payments to FQHCs 

and RHCs. Furthermore, only one regional office official told us that a 

CMS review identified issues related to Medicaid payments for FQHCs and 

RHCs.

64 CMS regional office officials reported surveying state Medicaid

offices during the summer of 2003 to determine the status of states’

implementation of the new Medicaid payment system. However, it is 

unclear how this information was used since CMS regional office officials 

involved with the survey were, on several occasions, unable to accurately

identify the type of payment system—a basic element required for

oversight—used by states within their jurisdiction. 

As a result of this limited oversight, CMS was unaware of several

compliance issues we identified regarding payment to FQHCs and RHCs. 

Specifically, CMS did not know that more than one-third of the 39 states

using the BIPA PPS may have incorrectly determined the base PPS rates 

by inappropriately excluding certain Medicaid-covered services. While this

detail was not included in all SPAs, CMS approved at least two SPAs that

 64As part of a review of Washington’s Medicaid managed care program, Region 10 officials

reviewed the state’s methodology for making supplemental payments to FQHCs and RHCs. 

According to a CMS regional office official, the review found that the state may have

inadequate documentation to support the value of supplemental payments made to FQHCs

and RHCs and thus may be overpaying some facilities. As of February 2005, CMS had not

finalized its report on this review. 

Page 39 GAO-05-452 Medicaid Payment for FQHCs and RHCs
listed such exclusions. Additionally, a CMS official with responsibility for 

overseeing Medicaid payments to FQHCs and RHCs acknowledged to us 

that one state had not included the costs of all appropriate Medicaid 

services in the calculation of the base rates, but was unaware of the other 

states we identified that had similarly excluded certain services from their 

base rate calculation. CMS was also unaware that 6 of the 25 states with 

alternative methodologies were not routinely ensuring that they were

paying at least as much as what would have been paid under the BIPA 

PPS. Furthermore, CMS did not know if states using an alternative 

payment methodology were updating their BIPA PPS rates for a change in

scope of services, as required by law, before performing this comparison, 

but believed that most were not. 

BIPA changed the way that states pay FQHCs and RHCs for services 

provided to Medicaid beneficiaries by establishing a PPS to pay these

providers. The BIPA PPS encouraged FQHCs and RHCs to operate more 

efficiently than did the prior cost-based reimbursement system. 

Additionally, BIPA provided states with the flexibility to implement an 

alternative payment methodology, which many states opted to use, but it

also established a minimum level of payment for FQHCs and RHCs. 

Conclusions 

Although BIPA required states to use the MEI to annually adjust BIPA PPS 

rates for inflation, the MEI may not be an appropriate index because it was

designed to estimate the increase in the total costs for the average 

physician to operate a medical practice, not the increase in costs 

associated with providing FQHC and RHC services. PPSs for other 

providers often incorporate an inflation index specifically designed to

reflect changes in the cost of services delivered by those providers, but no 

such inflation index has been developed to reflect the services typically 

provided by FQHCs and RHCs. 

CMS is responsible for overseeing states’ Medicaid programs, including 

states’ implementation of the BIPA payment requirements, but its guidance

and oversight have not consistently ensured that states properly

implemented the new requirements. Specifically, CMS approved SPAs that 

did not contain sufficient detail to convey basic information, such as

whether the state intended to implement the BIPA PPS or an alternative 

methodology, which hindered CMS’s ability to properly oversee states’ 

payment systems. In addition, CMS guidance did not address certain BIPA 

requirements such as how rates were to be adjusted for a change in scope 

of services. As a result, some states included factors in their definitions of

change in scope of services that are not directly related to the provision of

Page 40 GAO-05-452 Medicaid Payment for FQHCs and RHCs
services, and other states did not specify what would constitute such a 

change or did not define procedures for making the adjustment. 

Furthermore, CMS’s oversight has not ensured that states’ BIPA PPSs have 

included all Medicaid-covered services as required or ensured that states’

alternative payment methodologies met the legal requirement that

payments be at least as much as they would have been under the BIPA 

PPS. Limited CMS oversight may be warranted given the relatively low

share of total Medicaid spending represented by FQHCs and RHCs and the 

agency’s many other competing priorities. However, CMS oversight must

be sufficient to ensure compliance with the law. Without such oversight,

CMS is unable to assure Congress that all FQHCs and RHCs are receiving 

the level of payment to which they are entitled, which is especially 

important in the absence of available evidence to determine whether there 

is a need to rebase or refine the BIPA PPS for these providers. 

In our draft report, we recommended that the Administrator of CMS 

explore the development of an inflation index that better captures the cost 

of services provided by or price of resources used by FQHCs and RHCs 

and propose to Congress, as appropriate, any needed revisions to the 

statute. CMS responded that there is currently no evidence or data to

reflect that the need for a revised inflation factor is warranted at this time. 

Because we continue to believe that CMS should explore developing an

index that more appropriately reflects the services provided by FQHCs 

and RHCs, we maintained this recommendation to CMS and elevated the 

issue to a matter for congressional consideration. 

Congress may wish to consider directing CMS to explore the development 

of an inflation index that better captures the cost of services provided by 

or price of resources used by FQHCs and RHCs or develop a strategy to 

periodically assess the adequacy of the MEI as an inflation index for 

adjusting PPS rates for FQHCs and RHCs. 

To provide for a more appropriate basis for adjusting BIPA PPS payment

rates for FQHCs and RHCs, we recommend that the Administrator of CMS

explore the development of an inflation index that better captures the cost 

of services provided by or price of resources used by FQHCs and RHCs 

and propose to Congress, as appropriate, any needed revisions to the 

statute. 

Matter for 

Congressional 

Consideration 

Recommendations for 

Executive Action

Page 41 GAO-05-452 Medicaid Payment for FQHCs and RHCs
In addition, to better ensure consistent state compliance with the BIPAmandated Medicaid payment requirements for FQHCs and RHCs, we

recommend that the Administrator of CMS take the following four actions:

• Ensure that states’ Medicaid plans provide sufficient information 

describing their methodologies for paying FQHCs and RHCs for Medicaid 

services, including, at a minimum, whether the state is using the BIPA PPS

or an alternative methodology. 

• Develop guidance for states describing what constitutes a change in scope 

of services provided by FQHCs and RHCs, including the definition of the 

specific elements that affect such a change. 

• Ensure that states’ FQHC and RHC BIPA PPS payment rates do not

inappropriately exclude the costs of Medicaid-covered services. 

• Ensure that states’ alternative payment methodologies are paying FQHCs 

and RHCs at least as much as what would be paid under the BIPA PPS, 

including any needed adjustments due to a change in scope of services. 

We provided a draft of this report for comment to the Secretary of Health 

and Human Services and Medicaid directors in Iowa, Missouri, Nebraska, 

New Hampshire, North Carolina, Vermont, Virginia, and Wisconsin. We 

received written comments from CMS that represented the views of both 

CMS and HRSA. We also received technical comments from CMS and the 

states, which we incorporated as appropriate. CMS comments are 

included in appendix IV.

CMS commented that it disagreed with the characterizations made in our 

report regarding the implementation of the BIPA legislation. CMS 

commented that it had little time to address implementation issues 

between the enactment of the BIPA legislation in December 2000 and the 

January 1, 2001, effective date of BIPA’s new Medicaid payment 

provisions. Our draft report acknowledged these dates, and we agree that

there was limited time between the law’s enactment and its effective date. 

However, our report addresses a broad range of BIPA implementation 

activities, including CMS oversight since BIPA was enacted in 2000. CMS 

noted, and the draft report acknowledged, that it issued guidance to the

states in both January 2001 and September 2001. While CMS commented 

and our draft report noted that all SPAs have been approved, we disagree 

with the CMS assertion that all SPAs are BIPA-compliant. As we noted in

the draft report, at least two states’ approved SPAs documented that

certain Medicaid-covered services would be excluded from the BIPA PPS 

rate, a practice that is not compliant with the law and related CMS

guidance. Furthermore, although other states’ SPAs may be 

Agency and State 

Comments and Our 

Evaluation 

Page 42 GAO-05-452 Medicaid Payment for FQHCs and RHCs
BIPA-compliant, we found several compliance issues with states’ payment 

methodologies for FQHCs and RHCs. For example, as noted in the draft

report and acknowledged by CMS in its comments, some states did not

include all Medicaid-covered services in their BIPA PPS rate. With regard

to the requirement that alternative payment methodologies pay at least as 

much as the BIPA PPS, CMS commented that it had not received

complaints from FQHCs and RHCs about the amount of payment received 

under an alternative methodology. We do not believe that the number of 

complaints should be the criteria to evaluate compliance with the statute. 

Regardless of whether providers in these states complained, CMS is

responsible for ensuring that states are complying with BIPA 

requirements. 

On the basis of our recommendations that CMS better ensure consistent

state compliance with the BIPA-mandated Medicaid payment requirements

for FQHCs and RHCs, CMS said that it would take the following actions: 

• request that SPAs clearly identify whether states intended to implement a 

BIPA PPS or an alternative methodology, 

• contact states to ascertain which Medicaid services they are excluding 

from the BIPA PPS rate determination and assist each state in complying 

with BIPA requirements for determining the BIPA PPS rate or in

establishing alternative payment methodologies, and 

• remind states that BIPA requires that alternative payment methodologies

pay at least as much as the BIPA PPS rate. 

Although these steps are important, they do not adequately ensure that

states are complying with BIPA requirements. For example, while it is 

important to remind states that alternative payment methodologies must

pay at least as much as the BIPA PPS, CMS needs to ensure that states’

alternative methodologies actually pay as much as the BIPA PPS. 

In response to our recommendation that CMS explore the development of 

an inflation index that better captures the cost of services provided by or 

price of resources used by FQHCs and RHCs, CMS said that the MEI was

selected because it is used by Medicare for these providers and that no 

evidence currently exists to reflect the need for a revised inflation factor. 

As we noted in the draft report, the MEI was designed to measure the

changing costs for the average physician, which may not be comparable to 

cost changes experienced by FQHCs and RHCs. For example, FQHCs 

often provide additional services, such as translation. Because we

continue to believe that CMS should explore developing an index that

better captures the inflationary changes experienced by FQHCs and RHCs, 

Page 43 GAO-05-452 Medicaid Payment for FQHCs and RHCs
we are also elevating this issue to a matter for congressional 

consideration. 

CMS also did not concur with our recommendation that it develop

guidance for states describing what constitutes a change in scope of

services provided by FQHCs and RHCs. In our draft report we

acknowledged that, in its guidance, CMS defined a change in scope of

services as “a change in type, intensity, duration and/or amount of

services.” The guidance also stated that “a change in the cost of a service 

is not considered in and of itself a change in the scope of services.”

However, as noted in our draft report, many states have yet to define

procedures for changes in scope of services and those with defined 

procedures sometimes included factors, such as remodeling or relocation, 

that were not directly related to the provision of services. Therefore, we

continue to believe that additional guidance, including the definition of the 

specific elements that affect a change in scope of services, is necessary. 

We are sending copies of this report to the Secretary of Health and Human 

Services, the Administrator of CMS, the Administrator of HRSA, and other 

interested parties. We will also make copies available to others on request. 

This report also will be available at no charge on GAO’s Web site at

http://www.gao.gov. 

Please call me on (202) 512-7118 or Debra Draper on (202) 512-5152 if you

have questions about this report. Major contributors to this report are 

listed in appendix V. 

Kathryn G. Allen 

Director, Health Care 

Page 44 GAO-05-452 Medicaid Payment for FQHCs and RHCs
Appendix I: Methodology for Review of

Selected States Using Cost-Based Appendix I: Methodology for Review of Reimbursement

Selected States Using Cost-Based 

Reimbursement 

To determine the need for rebasing or refining costs for making payments 

under the Medicaid prospective payment system (PPS) for Federally 

Qualified Health Centers (FQHC) and Rural Health Clinics (RHC), we

obtained detailed information from 5 of the 11 states that used cost-based 

reimbursement as their alternative payment methodology for both FQHCs 

and RHCs. We followed this approach since the Medicare, Medicaid, and 

SCHIP Benefits Improvement and Protection Act of 2000 (BIPA) required 

states using an alternative payment methodology to ensure that their 

methodology resulted in payment no lower than payment under the BIPA 

PPS. We therefore assumed that these states would have data available on 

their cost-based payment rates as well as comparative BIPA PPS rates. 

Having both rates for each FQHC and RHC in the selected states would 

enable us to assess the extent to which FQHCs’ and RHCs’ reasonable 

costs were covered under the PPS.1

We selected states for the targeted review if, according to their responses 

to our survey, they met the following four criteria for both FQHCs and 

RHCs: 

• implemented cost-based reimbursement as their alternative payment 

methodology, 

• required FQHCs and RHCs to submit cost reports and the state audited 

them, 

• had at least 1 year of audited cost reports following the implementation of

their alternative payment methodologies, and 

• determined what the FQHCs’ and RHCs’ payments would have been if the 

state had implemented the BIPA PPS. 

According to their survey responses, five states met all of these criteria—

Iowa, Missouri, Vermont, Virginia, and Wisconsin.

 1

Providers paid under a cost-based reimbursement methodology may not have the same

financial incentives to operate as efficiently as those providers paid under a PPS. As a 

result, our analysis may overestimate what the difference in providers’ reasonable costs

and BIPA PPS rates would be if the providers had been paid under the BIPA PPS. However,

because many states that pay providers under the BIPA PPS no longer required cost

reports and because states’ definition of reasonable costs varied, we were unable to 

compare the BIPA PPS rates to the reasonable costs of FQHCs and RHCs in these states. 

Page 45 GAO-05-452 Medicaid Payment for FQHCs and RHCs
Appendix I: Methodology for Review of

Selected States Using Cost-Based

Reimbursement

We requested that the five states provide us the 2001, 2002, and 2003 costbased and BIPA PPS payment rates for each of their FQHCs and RHCs.2

On the basis of their responses we excluded Missouri from further 

analysis. Missouri had determined the 2001 BIPA PPS rates for only a 

portion of FQHCs and RHCs in the state and had not determined the 2002 

or 2003 BIPA PPS rates for any FQHCs or RHCs. Additionally, Missouri 

was unable to provide us with 2002 and 2003 per visit cost-based rates. 

While we found that Vermont had not determined the 2002 and 2003 BIPA 

PPS rates for its FQHCs and RHCs, we were able to estimate those rates 

by inflating the 2001 BIPA PPS rates for each FQHC and RHC by the 

Medicare Economic Index (MEI), the annual inflation adjustment required 

by BIPA. 

For our analysis, we included FQHCs and RHCs in the four states for 

which 3 full years of data were available—2001, 2002, and 2003. While we

generally relied on and did not independently verify the data provided to

us by the states, we did review the data for reasonableness and to identify

unusual patterns, including outliers. We identified some data that required 

follow-up with state Medicaid officials to obtain a better understanding of

the reason for these patterns. As a result of these additional inquiries, one 

RHC was excluded from the analysis. 

We analyzed the data by state and type of provider (FQHC or RHC). We

assessed (1) the percentage and dollar difference between the cost-based 

and BIPA PPS rates and (2) the number of providers whose cost-based 

rates exceeded their BIPA PPS rates. This analysis allowed us to compare 

reasonable costs with BIPA PPS rates in the selected states. The results of

this analysis for the four states reviewed cannot be generalized to other

states. 

 2

Wisconsin also provided the payment rates for RHCs paid under another alternative 

payment methodology; however, our analysis only included the RHCs paid under costbased reimbursement. 

Page 46 GAO-05-452 Medicaid Payment for FQHCs and RHCs
Ap

Payment

pendix II: Overview of Prospective

 Systems 

Page 47 GAO-05-452

Appendix II: Overview of Prospective 

Payment Systems 

Under prospective payment, a health care provider’s payment is based on 

predetermined rates and is unaffected by the provider’s actual costs or the 

amount of money charged for products or services. An important objective

of a PPS is to create incentives for providers to operate more efficiently. 

This is done by making providers responsible for the difference between 

what they are paid and their actual costs. Therefore, providers whose 

costs exceed the predetermined payment rate will experience a loss and 

those whose costs are less than the payment rate will profit. 

In a PPS, the payment rate for a product or service may be determined by 

the following general formula: 

Payment rate = In ia base payment amoun x update factor x inpu -pr ce 

adjus ment factor x re a ve value of the produc or serv ce x o her rate

adjus ment factors 

PPS Structure 

it l t t i

t l ti t i t

t

• The initial base payment amount is usually a dollar amount for a specific 

year that reflects policymakers’ decisions on the unit of payment for the 

unit of service (e.g., visit, episode of care, day) and the appropriate initial

level of payment for the average unit. 

• The update factor adjusts the initial base amount for inflation and other 

factors to set the base level of payment for the rate year. 

• The input-price adjustment factor raises or lowers the base amount to

reflect geographic price differences, such as differences in wages. 

• The relative value adjusts the base amount to reflect the expected relative 

costliness of the particular product or service compared with that of the 

average unit of that product or service. 

• One or more additional rate adjustment factors designed to reflect certain 

characteristics of the provider, the service, or the specific patient may be

applied to the payment rate. For example, the payment rate may be 

adjusted on the basis of patients’ severity of illness or condition treated by

a provider, referred to as case-mix. Additionally, some systems include an 

adjustment to mitigate the financial risk of providers who incur unusually 

large costs. This adjustment may be in the form of an outlier payment in 

which additional payments are made to the provider for cases that exceed 

a specified threshold. 

Medicaid Payment for FQHCs and RHCs
Appendix II: Overview of Prospective

Payment Systems 

BIPA established a new PPS to reimburse FQHCs and RHCs for services 

provided to Medicaid beneficiaries on or after January 1, 2001.1

 Under the 

new PPS, the base payment amount—the payment for 2001—was set at

each FQHC’s or RHC’s average cost per visit for fiscal years 1999 and 2000. 

Future years’ payment rates were to be adjusted annually for inflation by

the MEI and, when necessary, to reflect a change in scope of services. 

Therefore: 

Payment rate = In ia base payment amoun x update factor x other ra e

adjus ment factor

it l t t

t

 

While it contains some of the features common in other PPSs, the BIPA 

PPS differs in other respects. For example, the initial base payment rate 

under the BIPA PPS is determined for each provider individually, and not 

for a group of providers as is the case for most other PPSs we reviewed. 

The BIPA PPS base rate is the average of each individual FQHC’s or RHC’s 

reasonable cost per visit in 1999 and 2000.2

 Additionally, the BIPA PPS 

does not include an input-price adjustment factor or a calculation of the 

relative value of the product. Table 13 compares the key features of the 

BIPA PPS to selected other PPSs, specifically those used by states to make

Medicaid payments to nursing homes and those used in Medicare to pay 

for home health, hospital outpatient, and skilled nursing home services.

3

BIPA PPS 

Comparison of BIPA PPS 

with Selected Other PPSs 

1

Prior to the passage of BIPA, federal law required state Medicaid programs to pay FQHCs

and RHCs on a cost-related basis. Such cost-based payment methods can be resourceintensive because they require the submission of cost reports and annual reconciliation,

can result in unpredictable payments and spending for providers and payers, and can 

weaken providers’ incentives for efficiency. 

2

Each state defines which of its FQHCs’ and RHCs’ reported costs are reasonable.

3

Medicare is the federal program that helps pay for health care services for approximately

40 million elderly and disabled individuals.

Page 48 GAO-05-452 Medicaid Payment for FQHCs and RHCs
Appendix II: Overview of Prospective

Payment Systems 

Table 13: Comparison of Key Features of BIPA PPS to Selected Other PPSs 

Initial base payment 

amount Other rate adjustment factors 

PPS 

Provider 

group 

Individual

provider

Update 

factor

Input-price

adjustment 

factor

(geographic 

adjustment) 

Relative

value Case-mix 

Change in

scope of 

services 

Outlier 

payment

a

Other

b

Medicaid 

FQHC and 

RHC (BIPA 

PPS) 

X Xc X

Medicaid 

nursing 

homed

X Xe X X X

Medicare 

home health 

X XfX X X X X

Medicare 

outpatient 

hospital 

X XgX X X X

Medicare 

skilled 

nursing 

facility 

X XhX X X

Source: GAO summary of information from BIPA, previous GAO work, CMS, and the Medicare Payment Advisory Commission. 

a

An outlier payment is an adjustment that mitigates the financial risk to providers by allowing 

additional payments for high-cost services or beneficiaries.

b

Examples of other rate adjustment factors include adjustments for the costs of new technology and

for beneficiaries who experience a significant change in their condition.

c

Under the BIPA PPS, states are to update payment rates annually using the MEI, which measures

the change in cost of providing physician services.

d

The features noted reflect those commonly found in states’ Medicaid nursing home payment

methodologies based on our analysis of 19 states, although the specific features varied by state. See

GAO, Medicaid Nursing Home Payments: States’ Payment Rates Largely Unaffected by Recent

Fiscal Pressure, GAO-04-143 (Washington, D.C.: Oct. 17, 2003).

e

While the specific update factor used varied among the 19 states analyzed in GAO-04-143, the two

most commonly used factors were the Consumer Price Index and the skilled nursing facility market

basket index developed by CMS.

f

Under the Medicare home health PPS, CMS updates the payment rate annually by the projected 

change in the home health market basket, which measures changes in the prices of goods and 

services bought by home health agencies.

g

Under the Medicare outpatient hospital PPS, CMS updates the payment rate annually by the hospital

market basket index, unless Congress stipulates otherwise.

h

Under the Medicare skilled nursing facility PPS, CMS updates the payment rate annually using a 

skilled nursing facility market basket index, which measures the national average price level for the 

goods and services purchased by these providers.

Page 49 GAO-05-452 Medicaid Payment for FQHCs and RHCs
Ap

Me

as o

pendix III: Medicaid Payment 

thodologies for FQHCs and RHCs, by State,

f June 1, 2004 

Page 50 GAO-05-452

Appendix III: Medicaid Payment 

Methodologies for FQHCs and RHCs, by 

State, as of June 1, 2004 

a

At the time of our survey, the state had not completed implementation of its BIPA PPS or alternative

methodology. As such, at least some FQHCs or RHCs were being paid an interim payment rate.

b

State does not have any RHCs.

Medicaid Payment for FQHCs and RHCs
Appendix III: Medicaid Payment 

Methodologies for FQHCs and RHCs, by State,

as of June 1, 2004 

c

Kentucky has the authority to use a payment methodology other than the BIPA PPS for paying 

FQHCs and RHCs in the counties operating under the state’s 1115 waiver managed care program.

d

Under Utah’s 1115 waiver, the state has the authority to use a payment methodology other than the

BIPA PPS for paying FQHCs for beneficiaries enrolled in the state’s Primary Care Network program.

According to state officials, FQHCs are reimbursed on a fee-for-service basis for any services

provided to beneficiaries in this 1115 waiver program.

Page 51 GAO-05-452 Medicaid Payment for FQHCs and RHCs
Appendix IV: Comments from the Centers for Medicare & Medicaid Services

Appendix IV: Comments from the Centers for 

Medicare & Medicaid Services 

Page 52 GAO-05-452 Medicaid Payment for FQHCs and RHCs
Appendix IV: Comments from the Centers for Medicare & Medicaid Services

Page 53 GAO-05-452 Medicaid Payment for FQHCs and RHCs
Appendix IV: Comments from the Centers for Medicare & Medicaid Services

Page 54 GAO-05-452 Medicaid Payment for FQHCs and RHCs
Appendix IV: Comments from the Centers for Medicare & Medicaid Services

Page 55 GAO-05-452 Medicaid Payment for FQHCs and RHCs
Appendix V: GAO Contact and Staff Acknowledgments

Page 56 GAO-05-452

Appendix V: GAO Contact and Staff 

Acknowledgments 

GAO Contact Debra Draper (202) 512-5152 

Major contributors included Michelle Rosenberg, Patricia Roy, Janice 

Raynor, Elizabeth T. Morrison, and Daniel Ries. 

Medicaid Payment for FQHCs and RHCs

Acknowledgments 

(290375)
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