United States Government Accountability Office

GAO Testimony 

Before the Subcommittee on Federal Financial 

Management, Government Information, and 

International Security, Committee on Homeland 

Security and Governmental Affairs, U.S. Senate 

MEDICAID INTEGRITY

Implementation of New 

Program Provides 

Opportunities for Federal 

Leadership to Combat 

Fraud, Waste, and Abuse 

Statement of Leslie G. Aronovitz 

Director, Health Care 

For Release on Delivery

Expected at 2:30 p.m. EDT

Tuesday, March 28, 2006

 

GAO-06-578T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

March 28, 2006

MEDICAID INTEGRITY

Implementation of New Program Provides 

Opportunities for Federal Leadership to 

Combat Fraud, Waste, and Abuse 

Highlights of GAO-06-578T, a testimony 

before the Subcommittee on Federal 

Financial Management, Government 

Information, and International Security, 

Committee on Homeland Security and 

Governmental Affairs, U.S. Senate 

Today’s hearing concerns fraud, 

waste, and abuse control in

Medicaid, a program that provides

health care coverage for over 

56 million eligible low-income

people and is jointly financed by 

the federal government and the

states. In fiscal year 2004, 

Medicaid had benefit payments of

$287 billion, with a federal share of 

about $168 billion. 

The states are primarily

responsible for ensuring

appropriate Medicaid payments 

through provider enrollment 

screening, claims review, 

overpayment recovery, and case

referral to law enforcement. At the 

federal level, the Centers for 

Medicare & Medicaid Services 

(CMS) is responsible for supporting 

and overseeing state fraud, waste,

and abuse control activities. 

The Subcommittee requested 

information on how CMS and the 

states can better serve taxpayers

and beneficiaries by reducing

Medicaid fraud. This statement 

will focus on existing concerns 

about CMS’s efforts to help states 

prevent and detect fraud, waste,

and abuse; how provisions in 

recent legislation providing for a 

Medicaid Integrity Program will 

help CMS expand its current 

efforts; and challenges CMS needs 

to address as it implements new 

Medicaid Integrity Program efforts. 

As GAO testified in 2005, there has been a wide disparity between the level

of staff and financial resources that CMS has expended to support and 

oversee state activities to control fraud and abuse and the amount of federal 

dollars at risk in Medicaid benefit payments. In fiscal year 2005, CMS 

dedicated an estimated 8.1 full-time equivalent employees to support states 

in their anti-fraud-and-abuse operations. In contrast, the federal government 

spent over $168 billion for Medicaid benefits in fiscal year 2004. Further, 

resource shortages severely limited two efforts that had shown potential to 

help states prevent and detect fraud, waste, and abuse. In addition to 

devoting limited staff and financial resources, CMS lacked a strategic plan to 

direct its anti-fraud-and-abuse efforts. 

Enacted in February 2006, the Deficit Reduction Act of 2005 (DRA) provided

for creation of the Medicaid Integrity Program and includes specific 

appropriations that CMS can use to fund activities to support anti-fraud-andabuse efforts. It also included provisions that will address the agency’s 

staffing and planning limitations related to Medicaid program integrity. For 

example, the law requires CMS to add 100 employees to work with states in 

support and oversight of their Medicaid program integrity efforts and to 

develop a comprehensive plan to explain how the agency will address 

Medicaid fraud, waste, and abuse. In addition, the DRA provided funds to 

expand a program that is designed to identify program vulnerabilities in 

Medicaid and Medicare—the federal health insurance program for the 

elderly and some disabled people—by examining billing and payment 

abnormalities in both programs. 

In implementing the DRA provisions related to the Medicaid Integrity 

Program, CMS has a unique opportunity to strengthen its leadership of state 

and federal efforts to control fraud, waste, and abuse in the Medicaid 

program. The most immediate challenge will be to develop its 

comprehensive plan that will provide strategic direction for CMS, the states, 

and law enforcement partners. 

www.gao.gov/cgi-bin/getrpt?GAO-06-578T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Leslie G. 

Aronovitz at (312) 220-7600 or 

aronovitzl@gao.gov. 
Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here today as you discuss the control of fraud, waste, 

and abuse in Medicaid, the program that provided health care coverage for 

over 56 million low-income individuals in fiscal year 2004, including 

children and the aged, blind, and disabled. Medicaid is jointly financed by 

the federal government and the states. In fiscal year 2004, Medicaid’s 

benefit payments totaled $287 billion, of which the federal share was 

about $168 billion. Medicaid is administered directly by the states and 

consists of 56 distinct state-level programs.1

In 2003, GAO added Medicaid to its list of high-risk programs, owing to the 

program’s size, growth, diversity, and fiscal management weaknesses.2

 We 

noted that insufficient federal and state oversight put the Medicaid 

program at significant risk for improper payments. Improper payments 

may be due to mistakes, abuse, or fraud.3

 Because, by their nature, fraud 

and abuse are not apparent until detected, the amount of Medicaid funds 

lost through health care providers’ inappropriate billings cannot be 

precisely quantified. A nationwide rate of improper payments for Medicaid 

has not been estimated, but even a rate as low as 3 percent would have

resulted in a loss of about $5 billion in federal funds in fiscal year 2004. To 

put this hypothetical figure in perspective, it is more than the amount that 

the federal government spent in fiscal year 2004 on the State Children’s 

Health Insurance Program (SCHIP).4 Further, Medicaid can be subject to 

waste, or extravagant and unnecessary expenditures. Because Medicaid 

represents a large and growing share of state budgets—more than 20 

 1

The 56 Medicaid programs include one for each of the 50 states, the District of Columbia, 

Puerto Rico, and the U.S. territories of American Samoa, Guam, Northern Mariana Islands,

and the Virgin Islands. Hereafter, all 56 entities are referred to as states. 

2

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

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

3

Improper payments can result from inadvertent errors as well as intended fraud and

abuse. Unlike inadvertent errors, which are often due to clerical errors or a 

misunderstanding of program rules, fraud involves an intentional act or representation to

deceive with knowledge that the action or representation could result in gain, while abuse 

typically involves actions that are inconsistent with acceptable business and medical 

practices that result in unnecessary cost. See, e.g., 42 CFR § 455.2 (2005). 

4

SCHIP is a jointly funded federal-state program that provides health insurance to children 

in low-income families who do not qualify for Medicaid and are not covered by other 

insurance. 

Page 1 GAO-06-578T
percent of state expenditures—funds lost to improper payments and waste 

can impact states’ abilities to serve beneficiaries in need. 

Fraud, waste, and abuse drain vital program dollars in ways that hurt both 

taxpayers and beneficiaries. Seeking and receiving reimbursement for 

services not provided squanders public funds that could have been used 

for beneficiaries’ health care. For example, in 2005, a North Carolina 

pharmacist was sentenced to 33 months in prison and ordered to pay more 

than $2 million in restitution for defrauding the Medicaid program by 

submitting claims for long-term care patients’ prescriptions that had not 

been refilled, delivered, or even requested by their caregivers. Similarly, a 

New York hospital agreed to pay $76.5 million to resolve allegations that it 

overbilled the Medicaid program for services provided in its clinics. In 

addition, when providers receive payment for unnecessary services, it can

have a negative impact on health care quality. For example, consider the 

case in 2004 against 20 dentists in California who were charged with 

conspiracy to defraud the state’s Medicaid program of $4.5 million. The 

dentists are alleged to have billed Medicaid for unnecessary or

inappropriate services that placed patients at risk of pain, infection, loss of 

teeth, and bodily injury—including reusing dental instruments without 

sterilizing them, performing dental surgeries without adequate anesthesia, 

and developing treatment plans that called for unnecessary root canals 

and fillings. 

States are the first line of defense against Medicaid fraud, waste, and 

abuse. Specifically, they must comply with federal requirements to ensure 

the qualifications of the providers who bill the program, detect improper 

payments, recover overpayments, and refer suspected cases of fraud and 

abuse to law enforcement authorities. At the federal level, the Centers for 

Medicare & Medicaid Services (CMS), an agency within the Department of 

Health and Human Services (HHS), is responsible for supporting and 

overseeing state fraud, waste, and abuse control activities. Last year, we 

testified that CMS had initiatives to assist states in combating fraud and 

abuse in their Medicaid programs but that its oversight of states’ activities 

and commitment of federal dollar and staff resources were limited.5

 Since 

then, the Deficit Reduction Act of 2005 (DRA)6

 provided for creation of a 

Medicaid Integrity Program and included other provisions designed to 

 5

GAO, Medicaid Fraud and Abuse: CMS’s Commitment to Helping States Safeguard

Program Dollars Is Limited, GAO-05-855T (Washington, D.C.: June 28, 2005). 

6

See Pub. L. No. 109-171, § 6034, 120 Stat. 3, 74-78 (2006). 

Page 2 GAO-06-578T
increase CMS’s level of effort to support state activities to address fraud, 

waste, and abuse in Medicaid. 

The Subcommittee requested information on ways that CMS and the states

can better serve taxpayers and Medicaid recipients by reducing or 

eliminating fraud in the program. My remarks today will focus on 

(1) existing concerns regarding CMS’s efforts to help states prevent and

detect fraud and abuse in the Medicaid program, (2) how provisions in the 

DRA will help CMS expand current efforts to address Medicaid fraud, 

waste, and abuse, and (3) challenges CMS faces as it implements new 

Medicaid Integrity Program efforts. To address these issues, we reviewed 

agency documents on Medicaid program integrity and oversight activities,

relevant provisions of the DRA, and our issued reports on CMS’s and 

states’ efforts to address Medicaid fraud, waste, and abuse. (Related GAO 

products are listed at the end of this statement.) We also interviewed CMS 

officials. We conducted our work in March 2006 in accordance with 

generally accepted government auditing standards. 

In summary, we testified last year that while CMS has activities to oversee 

and support state efforts to address fraud and abuse in the Medicaid 

program, the agency has not devoted the staff and financial resources to 

its efforts that are commensurate with the risks involved. In addition, CMS 

has lacked plans to guide federal and state agencies that were working to 

prevent or deter Medicaid fraud and abuse. Enacted in February 2006, the

DRA provided for the creation of a new Medicaid Integrity Program, with 

specified appropriations to fund it. DRA also requires CMS to devote an 

additional 100 full-time-equivalent staff to combating Medicaid provider 

fraud and abuse; develop a comprehensive plan for the Medicaid Integrity 

Program every 5 fiscal years; and report annually on its use, and the 

effectiveness of its use, of the appropriated funds. In implementing the

DRA provisions related to the Medicaid Integrity Program, CMS faces a 

major challenge—to develop a comprehensive plan that provides strategic

direction for CMS, the states, and law enforcement partners. In developing 

its plan, CMS will need to focus on how it intends to allocate resources 

among activities to reduce program risk to the greatest extent possible and 

how to effectively deploy program integrity staff within the agency. 

Planning for, and implementing, the DRA provisions provide CMS with a 

unique opportunity to strengthen its leadership of state and federal efforts 

to control fraud, waste, and abuse in the Medicaid program. 

Page 3 GAO-06-578T
Within broad federal guidelines, each state’s Medicaid program establishes 

its own eligibility standards; determines the type, amount, duration, and 

scope of covered services; and sets payment rates. In general, the federal

government matches state Medicaid spending for medical assistance 

according to a formula based on each state’s per capita income. In fiscal 

year 2006, the federal contribution ranges from 50 to 76 cents of every

state dollar spent on medical assistance. For most state Medicaid 

administrative costs, the federal match rate is 50 percent.7

Background 

As program administrators, states have primary responsibility for 

conducting program integrity activities that address provider enrollment, 

claims review, and case referrals. Specifically, federal statute or CMS 

regulations require states to 

• collect and verify basic information on potential providers, including 

whether the providers meet state licensure requirements and are not 

prohibited from participating in federal health care programs; 

• have an automated claims payment and information retrieval system—

intended to verify the accuracy of claims, the correct use of payment 

codes, and patients’ Medicaid eligibility—and a claims review system—

intended to develop statistical profiles on services, providers, and 

beneficiaries to identify potential improper payments;8

 and 

• refer suspected overpayments or overutilization cases to other units in the 

Medicaid agency for corrective action, and potential fraud cases to law 

enforcement—generally to the state’s Medicaid Fraud Control Unit for 

investigation and prosecution.9

 7

For skilled professional medical personnel engaged in program integrity activities, such as 

those who review medical records, 75 percent federal matching is available. 

8

CMS requires that states have certain information processing capabilities, including a

Medicaid Management Information System and a Surveillance and Utilization Review 

Subsystem. 

9

Medicaid Fraud Control Units can, in turn, refer some cases to the HHS Office of Inspector 

General, the Federal Bureau of Investigation, and the Department of Justice for further

investigation and prosecution. 

Page 4 GAO-06-578T
As noted in our 2004 report,10 states use a variety of controls and 

safeguards to stem improper provider payments. For example, states 

reported using information technology to integrate databases containing 

provider, beneficiary, and claims information and to increase the 

effectiveness of their utilization reviews. Various states individually 

attributed cost savings or recoupments to these efforts, valued in the 

millions of dollars. 

In contrast, CMS’s role in curbing fraud, waste, and abuse in the Medicaid 

program is largely one of support to the states. As we reported in 2004,11

CMS administers two pilot projects, one focused on measuring the 

accuracy of a state’s Medicaid claims payments—Payment Accuracy 

Measurement (PAM)—and the other focused on improper billing detection 

and utilization patterns by linking Medicare12 and Medicaid claims 

information (Medi-Medi). CMS also sponsors general technical assistance 

and information-sharing through its Medicaid fraud and abuse technical 

assistance group (TAG). In addition, CMS performs oversight of states’ 

Medicaid fraud and abuse control activities through its compliance 

reviews. (See table 1.) 

 10GAO, Medicaid Program Integrity: State and Federal Efforts to Prevent and Detect

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

11GAO-04-707. 

12Medicare is the federal program that helps pay for a variety of health care services and 

items on behalf of about 42 million elderly and disabled beneficiaries.

Page 5 GAO-06-578T
Table 1: CMS Activities to Support and Oversee States’ Fraud and Abuse Control 

Efforts, Fiscal Year 2004 

CMS initiatives Description

PAM/ Payment Error Rate 

Measurement (PERM) 

CMS conducted a 3-year pilot called PAM to develop 

estimates of states’ accuracy in paying Medicaid claims. 

During fiscal year 2006, PAM will become a permanent 

program—to be known as the PERM initiative—in order 

to measure improper payments in Medicaid, to fulfill a 

requirement of the Improper Payments Information Act 

of 2002.a Under PERM, states will be expected to 

ultimately reduce their payment error rates over time by 

better targeting program integrity activities in their 

Medicaid and SCHIP programs. 

Medi-Medi Under this pilot program, CMS facilitates the sharing of 

health benefit and claims information between the 

Medicaid and Medicare programs. Medi-Medi is a data 

match pilot designed to identify improper billing and 

utilization patterns by matching Medicare and Medicaid 

claims information on providers and beneficiaries to 

reduce fraudulent schemes that cross program

boundaries. 

TAG Through telephone conferencing, CMS provides a forum 

for states to discuss issues, solutions, resources, and 

experiences on fraud and abuse issues. Any state may 

participate; roughly one-third do so regularly. States 

have also used the TAG to propose policy changes to 

CMS. 

Compliance reviews CMS conducts on-site reviews to assess whether state 

Medicaid fraud and abuse control efforts comply with 

federal requirements, such as those governing provider 

enrollment, claims review, utilization control, and 

coordination with each state’s Medicaid Fraud Control 

Unit. If reviewers find a state that is significantly out of 

compliance, they may encourage it to develop a 

corrective action plan and revisit the state to verify 

actions taken. 

Source: GAO-04-707. 

a

Pub. L. No. 107-300, 116 Stat. 2350. 

CMS also has a significant role in curbing fraud, waste, and abuse in 

Medicare. Through its Medicare Integrity Program, CMS contracts with 

companies to conduct program integrity activities, such as reviewing 

claims and ensuring that Medicare pays the appropriate amount when 

beneficiaries have other health insurance. 

Page 6 GAO-06-578T
As we testified last year, a wide disparity exists between the level of staff 

and financial resources that CMS has expended to support and oversee 

states’ fraud and abuse control activities and the amount of federal dollars 

at stake in Medicaid benefit payments.13 In fiscal year 2005, CMS dedicated 

an estimated 8.1 full-time-equivalent employees to support and oversee 

states’ anti-fraud-and-abuse operations. In contrast, the federal 

government spent over $168 billion for Medicaid benefits in fiscal year 

2004. Further, some of the promising efforts to support and oversee states 

were at risk of being cut back or terminated, and CMS lacked a strategic

plan to direct its anti-fraud-and-abuse efforts. 

Funding for some of CMS’s most promising anti-fraud-and-abuse activities 

declined in recent years, which threatened the continuity of these efforts. 

The amount of funding for the project to estimate state improper payment 

rates, PAM/PERM, and the project to match Medicare and Medicaid 

claims, Medi-Medi, declined from $7.8 million in fiscal year 2004 to 

$3.6 million in fiscal year 2005. Both of these projects are important. 

Measuring improper payments in Medicaid and other programs is required 

by statute, while Medi-Medi is uncovering significant billing problems. As

of March 31, 2005, seven states with fully operational Medi-Medi projects 

reported a total of $133.1 million in returns to the Medicaid and Medicare 

programs, $59.7 million in program vulnerabilities identified, and 

$2 million in overpayments to be recovered. However, because of 

anticipated unmet funding needs, we testified that existing Medi-Medi 

projects were at risk of being scaled back considerably or eliminated 

entirely. Last year, agency officials noted that several other states were 

interested in participating in the program but that CMS would not expand 

the program without a new allocation or realigment of funds.

Further, we testified that the HHS budget appropriations for CMS’s 

Medicaid compliance reviews had decreased each year from fiscal year 

2002 through fiscal year 2004. Since 2000, CMS staff from the regional 

offices and headquarters had conducted compliance reviews of seven to

eight states a year. These reviews proved to be effective. However, at that 

pace, CMS would review states’ programs once every 7 years, preventing

the agency from having up-to-date knowledge on more than a handful of 

states at any given time.

CMS Committed Few 

Resources and Had 

No Strategic Plan to 

Address Medicaid 

Fraud and Abuse 

 13GAO-05-855T. We did not address issues regarding waste in this testimony. 

Page 7 GAO-06-578T
Resource shortages also have severely limited CMS’s activities to provide 

technical assistance and disseminate information on states’ best practices. 

These activities had demonstrated positive results. However, CMS has not 

sponsored a national conference with state program integrity officials 

since 2003 and has not sponsored any fraud and abuse workshops or 

training since 2000. 

In addition to devoting limited staff and financial resources, CMS lacked a 

strategic plan to direct its anti-fraud-and-abuse efforts.14 Neither HHS nor 

CMS had produced a public document that included long-term goals in the 

area of supporting states’ efforts to address fraud and abuse in the 

Medicaid program and specific plans for achieving these goals. 

The DRA has added substantially to CMS’s authority, resources, and 

responsibilities to address Medicaid fraud, waste, and abuse.15 It 

established a new program that is solely focused on promoting the 

integrity of Medicaid and provides specified appropriations that CMS can

use to fund activities to support state efforts to combat fraud, waste, and 

abuse. To conduct the new Medicaid Integrity Program, the law specified 

an appropriation of $5 million in fiscal year 2006, $50 million in each of 

fiscal years 2007 and 2008, and $75 million in each of the subsequent fiscal 

years. As part of the Medicaid Integrity Program, CMS is given authority to

contract with eligible entities to conduct activities to address fraud, waste, 

and abuse in the state programs through activities such as audits of 

consulting contracts and reported costs of nursing home services.16 In 

addition, CMS is required to increase by 100 its full-time-equivalent 

employees whose duties consist solely of protecting the integrity of the 

Medicaid program by providing effective support and assistance to the 

CMS Has New 

Authority, Resources, 

and Responsibilities 

to Address Fraud, 

Waste, and Abuse 

 14GAO-05-855T. 

15While the DRA vests the Secretary of Health and Human Services with authority to 

implement the Medicaid Integrity Program, in general, administration of the Medicaid 

program is delegated to CMS.

16The activities for which CMS can contract with entities under the Medicaid Integrity 

Program are (1) review of Medicaid providers or others—such as managed care plans—to

determine whether their actions have led, or could lead, to waste, fraud, or abuse; (2) audit 

of claims for payment for items, services, or administrative services rendered, including

audits of reported costs and consulting and other contracts; (3) identification of

overpayments to individuals or entities receiving Medicaid payments; and (4) education of 

providers of services, managed care entities, beneficiaries, and other individuals on

payment integrity and quality of care. 

Page 8 GAO-06-578T
states.17 The authorization of funds for the Medicaid Integrity Program is 

similar to that of the Medicare Integrity Program, which was also 

established with specified appropriations and the authority for CMS to 

contract with companies to conduct integrity activities. CMS credits the 

Medicare Integrity Program with helping the agency measure and reduce 

payment errors in the Medicare fee-for-service program. 

The DRA also provides for a national expansion of the Medi-Medi 

program. The statute appropriates funds for CMS to contract with third 

parties to identify program vulnerabilities in Medicare and Medicaid 

through examining billing and payment abnormalities. The funds also can 

be used in connection with the Medi-Medi program for two other 

purposes. First, the funds can be used to coordinate actions by CMS, the 

states, the Attorney General, and the HHS Office of Inspector General to 

protect Medicaid and Medicare expenditures. Second, the funds can be 

used to increase the effectiveness and efficiency of both Medicare and

Medicaid through cost avoidance, savings, and recouping fraudulent, 

wasteful, or abusive expenditures. For Medi-Medi, the statute appropriates 

$12 million for fiscal year 2006, $24 million for fiscal year 2007, $36 million 

for fiscal year 2008, $48 million for fiscal year 2009, and $60 million for 

fiscal year 2010 and each subsequent fiscal year. 

Beginning in fiscal year 2006 and every 5 fiscal years thereafter, the DRA 

requires CMS to establish a comprehensive plan for ensuring the integrity

of the Medicaid program by combating fraud, waste, and abuse. CMS is 

required to develop the plan in consultation with the Attorney General, the 

Director of the Federal Bureau of Investigation, the Comptroller General, 

the HHS Office of Inspector General, and state officials responsible for 

controlling Medicaid provider fraud and abuse. Developing a plan in 

consultation with other agencies with responsibilities to address fraud, 

waste, and abuse issues will encourage additional dialogue on the overall

direction of federal and state efforts. In addition, CMS is required to 

submit an annual report to Congress no later than 180 days after the end of 

each fiscal year, which identifies the agency’s use, and the effectiveness of 

the use, of the Medicaid Integrity Program funds it has expended. This 

reporting mechanism can help CMS focus on making the wisest 

investment of its new resources. 

 17The DRA did not establish a date for CMS to complete its hiring of full-time-equivalent 

staff. 

Page 9 GAO-06-578T
CMS faces a key implementation challenge early on—to develop a 

comprehensive plan for Medicaid program integrity. A properly developed

plan will provide strategic direction for CMS, its contractors, the states, 

and law enforcement partners. Key areas that the plan should address 

include the allocation of financial resources among activities to reduce 

program risk to the greatest extent possible and the effective deployment 

of program integrity staff within the agency. CMS’s plan—if well thought 

out and formulated—could provide a blueprint for ensuring that new DRA 

funding is appropriately invested and that CMS staff devoted to Medicaid 

program integrity efforts are most effectively deployed. CMS is still in the 

beginning stages of formulating its plan and has not received final 

departmental approval for some of its initial implementation steps. As a 

result, agency officials were not at liberty to discuss their planning efforts 

with us in much detail. 

A comprehensive plan for program integrity is not a new concept for CMS. 

In February 1999, CMS issued such a plan for the Medicare and Medicaid 

programs.18 Most of the material in this plan focused on Medicare, and the 

plan has not been updated since 1999. However, it could serve as a 

possible template for communicating updated information on Medicaid 

efforts. In addition to communicating information about the goals that 

CMS hoped to achieve and proposed strategies for achieving them, the 

plan described an iterative program integrity process that focused on 

identifying and assessing risk, developing and implementing approaches to 

addressing risk, and monitoring and measuring progress. Further, the 

process described in the 1999 program integrity plan is similar to 

strategies that we have highlighted in the past as being used by public and

private sector organizations to manage improper payments.19

Structured analysis of risk and meaningful measures of performance are 

an integral part of any plan, but will prove challenging to develop in the 

Medicaid program. The difficulty stems from CMS’s having limited 

Developing CMS’s 

Plan Is a Critical First 

Step 

 18Health Care Financing Administration, Comprehensive Plan for Program Integrity, 

HCFA-02142 (Baltimore, Md.: February 1999). Until July 1, 2001, CMS was called the Health

Care Financing Administration. 

19GAO, Strategies to Manage Improper Payments: Learning from Public and Private 

Sector Organizations, GAO-02-69G (Washington, D.C.: October 2001). Strategies include 

creating a culture of accountability by establishing a positive and supportive attitude 

toward improving program integrity; assessing the nature and extent of risks; taking action

to address identified risk areas; using and sharing information to manage improper 

payments; and monitoring activities to address improper payments over time. 

Page 10 GAO-06-578T
information on the extent of improper payments in the state programs. In 

addition, because state programs vary in their design, the intensity of their 

risks of fraud, waste, and abuse may differ. While a comprehensive plan

cannot deal with the issues of each state, it can articulate a strategy for 

states to address the vulnerabilities in their programs. Further, developing 

meaningful measures of the impact of the Medicaid Integrity Program will 

require a long-term investment of resources, and these measures will not 

be available for CMS’s first comprehensive plan. Medicare has taken years 

to develop and refine its error-rate testing program, under which CMS 

conducts an annual study to estimate Medicare improper payments. 

CMS is in the early stages of developing a similar measure for Medicaid. 

The agency recently completed its 3-year PAM pilot, so the results of 

payment error studies are available from the 27 participating states. CMS 

is transitioning from PAM to PERM. Under PERM, states will be expected

to ultimately reduce their payment error rates over time by better targeting 

program integrity activities in their Medicaid and SCHIP programs. When 

fully implemented, PERM should allow CMS to compile data about 

Medicaid improper payments on the state and national levels, which could 

allow CMS to track progress, as well as identify states that may require 

special assistance, in reducing improper payment error rates. CMS expects 

to have its first PERM results in 2008. In addition to assessing progress 

toward reducing improper payments, CMS will also need to develop other 

methods of measuring the effectiveness of program integrity activities. 

One such measure, used in the Medicare program, is calculating a return

on investment, which measures the dollars saved for each dollar spent. 

In developing its plan, CMS must decide how to most appropriately invest 

new resources. In the past, CMS has invested a substantial amount of its 

resources in the oversight of states’ financial management activities, such

as state claims for federal matching. For more than a decade, states have 

used various financing schemes to inappropriately cause the federal 

government to pay an excessive share of reported Medicaid costs.20 While 

financial oversight of these schemes was needed, states also needed 

 20GAO, Medicaid Financing: States’ Use of Contingency-Fee Consultants to Maximize 

Federal Reimbursements Highlights Need for Improved Federal Oversight, GAO-05-748 

(Washington, D.C.: June 28, 2005); Medicaid: States’ Efforts to Maximize Federal 

Reimbursements Highlight Need for Improved Federal Oversight, GAO-05-836T 

(Washington, D.C.: June 28, 2005); and Medicaid: Improved Federal Oversight of State 

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

Page 11 GAO-06-578T
encouragement and support to address fraud committed by providers 

against the state Medicaid program. 

Now, in light of new funds provided through the Medicaid Integrity 

Program, CMS will be faced with the goal of prudently investing millions 

of dollars each year to address fraud by providers and others—such as 

managed care plans—in Medicaid. In order to spend its new funds 

appropriately, CMS must weigh its options and consider both the costs 

and benefits of various activities, such as educating providers as compared 

with conducting reviews to help identify potential fraud. Nevertheless, 

CMS does have some flexibility in investing its new Medicaid Integrity 

Program resources. If CMS does not spend all the funds appropriated for 

the Medicaid Integrity Program in one year, the agency will be allowed to

spend them in succeeding years.21 However, the requirement to annually 

report on its use of funds will provide information on whether CMS is 

generally using the funding, as opposed to continually rolling funding 

forward. 

CMS may also be able to use some of its DRA funds to help facilitate 

communication and coordination with states through conferences and the 

TAG. According to a CMS official, such information-sharing and technical

assistance activities would not be expensive to support and could result in 

returns that would exceed the relatively low investment. Similarly, the 

TAG has served as a forum to share expertise and best practices; advise

CMS on policies, procedures, and program development; and make 

recommendations on federal policy and legislative changes. CMS might be 

able to further facilitate state participation through additional support for 

this forum. 

Another key planning area for CMS involves deciding how best to deploy 

Medicaid program integrity staff within the agency. This is a particularly 

critical issue as CMS ramps up its Medicaid Integrity Program with the 

hiring of new employees. A CMS official told us that the agency is already 

developing position descriptions as a precursor to hiring new employees 

to help address the DRA requirement to increase by 100 the number of fulltime-equivalent employees devoted to assisting states in efforts to combat 

Medicaid provider fraud and abuse. In addition, the agency has made some 

preliminary decisions about placement of staff within the central office 

and its regional offices. It will take considerable time and effort for CMS to 

 21See Social Security Act § 1936(e), as added by Pub. L. No. 109-171, § 6034, 120 Stat. at 76. 

Page 12 GAO-06-578T
hire qualified staff and train them to perform the various activities that 

ensure good stewardship of the program. CMS could not provide us with a 

definitive schedule for when the bulk of its hiring will be completed. Also 

consistent with a new focus on fraud, waste, and abuse prevention, the 

agency is considering the steps it will need to take to competitively select 

contractors to conduct reviews to help identify fraudulent and abusive 

billing behavior by providers. CMS is currently exploring how it will use 

these contractors, either to support state efforts or to identify problems 

across states. 

CMS has also decided to establish a new group to house the Medicaid 

Integrity Program. This group will be composed of both central and 

regional office staff and report directly to the director of the Center for 

Medicaid and State Operations (CMSO). CMSO, which is responsible for 

most other Medicaid activities, currently staffs the state compliance 

reviews and TAG activities. However, the Medi-Medi and PAM/PERM 

projects are the responsibility of CMS’s Office of Financial Management, 

which also staffs the Medicare Integrity Program. In the past, we have 

raised concerns that Medicaid anti-fraud-and-abuse staff at headquarters 

have not been a part of the agency’s office responsible for conducting 

other key anti-fraud-and-abuse activities, including those for the Medicare 

program. The staff at CMSO have the most experience working with 

Medicaid issues, although the staff at CMS with experience in Medicare 

program integrity contracting are located in the Office of Financial 

Management. As CMS establishes the Medicaid Integrity Program and new 

employees come on board, it will be important to ensure that the agency is 

in an optimal position to leverage the expertise and experience of its 

existing staff. For example, CMS will need to ensure that staff with 

expertise in developing strategies for combating Medicare fraud, waste, 

and abuse work in a closely coordinated fashion with staff that are 

familiar with states’ Medicaid plans and fraud control officials and 

activities. 

Implementing the Medicaid Integrity Program and developing a 

comprehensive plan gives CMS a unique opportunity to provide leadership 

to states and law enforcement in their fraud, waste, and abuse control 

efforts. Having dedicated resources also presents challenges to ensure that 

CMS spends wisely as it starts new initiatives and ensures the continuity of 

current beneficial activities. Using this opportunity to develop an iterative 

process of working with states to identify risks, develop strategies to 

address them, and measure the results through assessing improper 

payment rates and potential recoveries can help ensure that the Medicaid 

Concluding 

Observations 

Page 13 GAO-06-578T
Integrity Program funding is targeted to an optimal effect. CMS has 

expertise in addressing fraud, waste, and abuse within the Medicare 

program and in the state programs that can be leveraged to benefit the 

Medicaid Integrity Program. Properly leveraging this expertise will require 

effective coordination and communication within CMS, with states, and 

with their law enforcement partners. 

We discussed the facts in this statement with a CMS Medicaid official, who 

stated that the agency is pleased to have new resources to address fraud, 

waste, and abuse in the Medicaid program. He indicated that CMS had 

developed proposals for implementing the Medicaid Integrity Program, but 

he was not in a position to discuss them in detail because they are 

undergoing review within HHS. CMS is presently deciding on the skills 

needed by the 100 additional full-time-equivalent employees required by 

the DRA; exploring options for contracting; and developing its 

comprehensive plan. 

Mr. Chairman, this concludes my prepared remarks. I would be happy to 

answer any questions that you or other Members of the Subcommittee 

may have. 

For further information regarding this statement, please contact Leslie G. 

Aronovitz at (312) 220-7600. 

Sheila K. Avruch, Assistant Director, Susan E. Barnidge, Sandra D. Gove, 

Kevin Milne, and Elizabeth T. Morrison contributed to this statement. 

Contact 

Acknowledgments 

Page 14 GAO-06-578T
Page 15 GAO-06-578T

Related GAO Products 

Medicaid Fraud and Abuse: CMS’s Commitment to Helping States 

Safeguard Program Dollars Is Limited. GAO-05-855T. Washington, D.C.: 

June 28, 2005. 

High-Risk Series: An Update. GAO-05-207. Washington, D.C.: January 

2005. 

Medicaid Program Integrity: State and Federal Efforts to Prevent and 

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

Major Management Challenges and Program Risks: Department of 

Health and Human Services. GAO-03-101. (Washington, D.C.: January 

2003). 

Strategies to Manage Improper Payments: Learning from Public and 

Private Sector Organizations. GAO-02-69G. Washington, D.C.: October 

2001. 

Medicaid: State Efforts to Control Improper Payments Vary. GAO-01-662. 

Washington, D.C.: June 7, 2001. 

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