Report to the Committee on Finance, 

U.S. Senate 

United States General Accounting Office 

GAO 

June 2004 MEDICAID WAIVERS

HHS Approvals of 

Pharmacy Plus 

Demonstrations 

Continue to Raise 

Cost and Oversight 

Concerns 

GAO-04-480 
www.gao.gov/cgi-bin/getrpt?GAO-04-480.

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. 

Highlights of GAO-04-480, a report to the 

Committee on Finance, U.S. Senate 

June 2004

MEDICAID WAIVERS

HHS Approvals of Pharmacy Plus 

Demonstrations Continue to Raise Cost 

and Oversight Concerns 

From January 2002 through May 2004, HHS reviewed Pharmacy Plus 

proposals from 15 states and approved four: Florida, Illinois, South Carolina, 

and Wisconsin. These demonstrations offer prescription drug coverage to 

low-income seniors not otherwise eligible for Medicaid. HHS denied 

proposals from Delaware and Hawaii as inconsistent with demonstration 

guidelines; most of the rest were not under active review because HHS had 

not determined how new Medicare prescription drug legislation will affect 

proposed or operating Pharmacy Plus demonstrations. Over 5 years, the four 

approved demonstrations will provide prescription drug coverage to half a 

million low-income people age 65 or older, at a projected cost of about 

$3.6 billion, of which the federal share would be about $2.1 billion. 

HHS has not adequately ensured that the four approved demonstrations will 

be budget neutral, that is, that the federal government will not spend more 

with the demonstrations than without them. HHS approved the 

demonstrations’ 5-year spending limits using projections of cost and 

beneficiary enrollment growth that exceeded benchmarks that HHS said it 

considered in assessing budget neutrality, specifically, states’ recent average 

growth rates and projections for Medicaid program growth nationwide. 

Neither HHS’s negotiations with the states nor its rationale for approving 

higher growth rates is documented. Using the benchmark growth rates, GAO 

estimates that none of the four demonstrations will be budget neutral and 

federal spending may increase significantly, for example, by more than 

$1 billion in Illinois and $416 million in Wisconsin over 5 years. 

Unrealistic savings assumptions also contribute to demonstration spending 

limits that are not likely to be budget neutral. States assumed that keeping 

low-income seniors healthy—thus preventing them from spending down 

their financial resources on health services and “diverting” them from 

Medicaid eligibility—would generate sufficient savings to offset the 

increased costs of providing a new drug benefit. GAO found neither state 

experience nor other research to support such savings. Without statespecific evidence, HHS approved savings assumptions for the four states 

ranging from $480 million to $2 billion per state over 5 years. Had more 

conservative assumptions been used to estimate demonstration savings, the 

proposals likely could not have been approved as budget neutral. 

Efforts by the states and HHS to evaluate and monitor the Pharmacy Plus 

demonstrations are in their early stages. The four states have taken few 

steps to put their own required evaluation plans into practice, and an 

independent evaluation contracted by HHS and started in October 2002 is 

scheduled to report in September 2005. In the interim, HHS has not ensured 

that all states meet requirements for progress reporting on the 

demonstrations. The information that states have submitted is often 

insufficient for determining whether the demonstrations are operating as 

intended, and this shortcoming will limit HHS’s oversight capability. 

Under section 1115 of the Social 

Security Act, the Secretary of 

Health and Human Services may 

waive certain Medicaid 

requirements for states seeking to 

deliver services through 

demonstration projects. By policy, 

these demonstrations must not 

increase federal spending. GAO has 

previously reported concerns with 

HHS’s approval process. 

GAO was asked to provide 

information on a new Medicaid 

section 1115 demonstration 

initiative called Pharmacy Plus, 

intended to allow states to cover 

prescription drugs for seniors not 

otherwise eligible for Medicaid. 

GAO reviewed the (1) approval 

status of state proposals, (2) extent 

to which HHS ensured that 

demonstrations are budget neutral, 

(3) basis for savings assumptions, 

and (4) federal and state steps to 

evaluate and monitor the 

demonstrations. 

GAO recommends that the 

Secretary of HHS strengthen the 

processes for approving and 

overseeing Pharmacy Plus and 

other Medicaid section 1115 

demonstrations. HHS concurred 

with several recommendations for 

strengthening demonstration 

approval and oversight but 

disagreed that review criteria 

should be clarified and applied to 

already-approved demonstrations. 

GAO maintains that the criteria for 

HHS’s approvals should be clear 

and consistently applied. 
Page i GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

Letter 1

Results in Brief 3

Background 7

HHS Has Reviewed 15 Pharmacy Plus Proposals and Approved 4 10

HHS Has Not Ensured That Approved Demonstrations’ Spending 

Limits Will Be Budget Neutral 17

Pharmacy Plus Savings Assumptions Not Well Supported 24

States Have Taken Few Steps to Evaluate Demonstrations, and 

HHS Has Not Ensured Sufficient or Timely Progress Reporting 29

Conclusions 35

Recommendations for Executive Action 36

Agency and State Comments and Our Evaluation 37

Appendix I Calculating a State’s Pharmacy Plus Spending 

Limit for All Medicaid Seniors 43 

Appendix II Denied, Withdrawn, and Pending Pharmacy Plus 

Demonstration Proposals as of May 2004 46 

Appendix III Comments from the Department of Health and 

Human Services 49 

GAO’s Response to the Department of Health and Human Services’ 

Specific Comments on GAO’s Findings 59

Appendix IV Comments from the State of Florida 62 

Appendix V Comments from the State of Illinois 63 

Appendix VI Comments from the State of Wisconsin 65 

GAO’s Response to the State of Wisconsin’s Specific Comments 70 

Contents 
Page ii GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

Appendix VII GAO Contact and Staff Acknowledgments 74 

GAO Contact 74

Acknowledgments 74

Related GAO Products 75 

Tables 

Table 1: Highlights of Pharmacy Plus Demonstrations Approved as 

of May 2004 11

Table 2: HHS-Approved, State Historical, and CMS Actuary Growth 

Rates 20

Table 3: HHS-Approved and Benchmark 5-Year Spending Limits 23

Table 4: States’ Projections of Medicaid Senior Populations after 5 

Years, with and without HHS-Approved Pharmacy Plus 

Demonstrations 25

Figure 

Figure 1: Steps to Calculate Projected 5-Year WithoutDemonstration Costs 44
Page iii GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

Abbreviations 

CBO Congressional Budget Office 

CMS Centers for Medicare & Medicaid Services 

FPL federal poverty level 

HHS Department of Health and Human Services 

HIFA Health Insurance Flexibility and Accountability 

MMA Medicare Prescription Drug, Improvement, and 

 Modernization Act of 2003 

OMB Office of Management and Budget 

PACE Pharmaceutical Assistance Contract for the Elderly 

PACENET Pharmaceutical Assistance Contract for the Elderly 

 Needs Enhancement Tier 

SCHIP State Children’s Health Insurance Program 

SSA Social Security Act 

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Page 1 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

June 30, 2004 

The Honorable Charles Grassley 

Chairman 

The Honorable Max Baucus 

Ranking Minority Member 

Committee on Finance 

United States Senate 

Under section 1115 of the Social Security Act (SSA), the Secretary of 

Health and Human Services may waive certain statutory requirements for 

Medicaid—the joint federal and state program financing health care for 

low-income families, certain seniors, and disabled individuals—in 

connection with experimental, pilot, or demonstration projects that are 

likely to promote program objectives.1

 Because of the projects’ 

experimental nature, the Department of Health and Human Services (HHS) 

requires demonstrations authorized under section 1115 to include 

measurable objectives and an evaluation component. In addition, since the 

early 1980s, HHS has required states to show that their proposals for 

section 1115 demonstrations are “budget neutral” for the federal 

government: that is, a proposed demonstration cannot raise federal 

expenditures beyond what they would be under a state’s existing program. 

In January 2002, HHS announced the Medicaid Pharmacy Plus section 

1115 demonstration initiative, offering states the opportunity to provide a 

prescription drug benefit to two groups—seniors (people age 65 or older) 

and disabled individuals—whose incomes, although low, exceed levels 

that would qualify them for full Medicaid eligibility. Under this initiative, 

HHS and the Centers for Medicare & Medicaid Services (CMS), the agency 

within HHS that has primary responsibility for reviewing the 

demonstration proposals, encourage states to test over 5 years whether 

extending a drug benefit to seniors who are not eligible for Medicaid 

 1

Section 1115 allows waivers of requirements in Medicaid, the State Children’s Health 

Insurance Program (SCHIP), and several other programs authorized under SSA. See section 

1115 (codified at 42 U.S.C. § 1315 (2000)); see also section 2107(e) of SSA (codified at 

42 U.S.C. § 1397gg(e)) (regarding the applicability of section 1115 to SCHIP). 

United States General Accounting Office 

Washington, DC 20548 
Page 2 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

would maintain these seniors’ health and hold down overall Medicaid 

costs.2

Over the past decade, Congress and others have raised concerns about the 

extent to which HHS has ensured that approved section 1115 

demonstration waivers promote the goals and fiscal integrity of both 

Medicaid and the State Children’s Health Insurance Program (SCHIP). In 

particular, Congress has been concerned about HHS’s waiver approval 

process and the federal costs associated with some of the demonstrations. 

Our past work has found, for example, that HHS’s process for approving 

demonstrations is not always clear or open to public input and that the 

department has not always ensured the budget neutrality of approved 

demonstrations, thereby raising federal expenditures.3

You asked us for information on the Pharmacy Plus initiative. We focused 

our review on the following four questions: 

1. How many states have applied for Pharmacy Plus demonstration 

waivers, and what is the status of their proposals? 

2. To what extent has HHS ensured that the approved demonstrations are 

budget neutral to the federal government? 

3. How well supported are states’ assumptions about savings that may 

accrue to Medicaid from the Pharmacy Plus demonstration waivers? 

4. What steps are states and HHS taking to evaluate approved 

demonstrations and to monitor if they are functioning as intended? 

Our work is based on a review and analysis of Pharmacy Plus 

demonstration waiver proposals considered and approved by HHS from 

January 2002 through May 2004. Our analysis covers only demonstration 

proposals submitted in response to HHS’s Pharmacy Plus initiative.4

 To 

 2

Although CMS is the agency within HHS that has primary responsibility for reviewing 

section 1115 demonstration waiver proposals, we refer to HHS throughout this report as 

the primary program entity because the authority to grant waivers for the demonstrations 

resides with the Secretary of HHS. 

3

A list of related GAO products appears at the end of this report. 

4

We do not include proposals to provide a prescription drug benefit to low-income seniors 

under an amendment to an existing section 1115 Medicaid managed care waiver, like those 

approved for Vermont and Maryland, because such proposals are reviewed under different 

guidelines. 
Page 3 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

determine the status of demonstrations under this initiative, we analyzed 

HHS data on all proposals it considered, including their number, 

outcomes, and characteristics. For approved demonstrations, we analyzed 

the applications as submitted by the states; HHS decision memorandums 

and approval letters; the applications as ultimately approved; HHS’s terms 

and conditions for approved demonstrations; and, when available, the 

states’ plans (called operational protocols) for how the demonstrations 

will operate. We also discussed the process of review and approval with 

officials of the reviewing agencies—HHS, CMS, and the Office of 

Management and Budget (OMB)—and we obtained information from 

officials representing the states with approved demonstrations. To assess 

budget neutrality, we obtained available budget justifications and 

documentation from state and federal officials and discussed with them 

the budget negotiations associated with each approved demonstration.5

 To 

examine the assumptions behind the initiative and the likelihood of 

associated savings, we reviewed published literature and interviewed 

officials from the Kaiser Commission on Medicaid and the Uninsured and 

the Congressional Budget Office (CBO). We discussed plans for evaluating 

the approved demonstrations with HHS and state officials. During our 

review, Congress passed the Medicare Prescription Drug, Improvement, 

and Modernization Act of 2003, which adds a drug benefit to Medicare, the 

federal program providing health insurance for the majority of people age 

65 or older regardless of income.6

 We considered the limited information 

available as of May 2004 about the relationship between Pharmacy Plus 

and the act. We conducted our work from December 2002 through June 

2004 in accordance with generally accepted government auditing 

standards. 

From January 2002 through May 2004, HHS reviewed Pharmacy Plus 

demonstration waiver proposals from 15 states. It approved four 

demonstrations (Florida, Illinois, South Carolina, and Wisconsin), denied 

two (Delaware and Hawaii), and considered nine other proposals. The 

four demonstrations, each approved for a 5-year period, cover most 

prescription drugs and incorporate cost sharing by beneficiaries. Together, 

the four demonstrations may enroll as many as half a million people age 

65 or older whose incomes are higher than states’ limits for Medicaid 

 5

To verify the accuracy of data included in state demonstration applications, we discussed 

these data and their sources with state officials. 

6

Pub. L. No. 108-173, 117 Stat. 2066. 

Results in Brief 
Page 4 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

eligibility. Combined 5-year state and federal spending for the four 

approved demonstrations’ new drug benefit is projected to total 

approximately $3.6 billion, the federal share of which is estimated to be 

about $2.1 billion. The two proposals that HHS denied were inconsistent 

with Pharmacy Plus guidelines. One state had an existing program that 

covered the same population proposed for the demonstration; the other 

wanted to expand coverage to people with incomes above the initiative’s 

limit of 200 percent of the federal poverty level (FPL). As of May 2004, 

most of the remaining nine demonstration proposals were not under active 

review by HHS, primarily because the department had not determined how 

the new Medicare legislation would affect the Pharmacy Plus initiative and 

whether HHS would continue to review Pharmacy Plus demonstration 

proposals. 

HHS has not adequately ensured that the four approved Pharmacy Plus 

demonstrations will be budget neutral, that is, that the federal government 

will spend no more with the demonstrations than without them. HHS has 

approved 5-year demonstration spending limits based on projections of 

cost and beneficiary enrollment growth that exceeded benchmarks that 

department officials said they considered in assessing states’ proposals for 

budget neutrality. These cost and enrollment growth benchmarks 

incorporate the states’ recent historical average growth rates and 

projections developed by CMS’s Office of the Actuary for Medicaid 

program growth nationwide. HHS has not established written criteria for 

how it reviews or approves state-proposed cost or enrollment growth rates 

against these benchmarks. HHS’s basis for approving state 

demonstrations’ spending limits as budget neutral is not clear, particularly 

for Illinois and Wisconsin, for neither the department’s negotiations with 

the states nor its rationale for approving higher-than-benchmark rates of 

estimated growth is documented. HHS’s internal decision 

memorandums—which described the factors that HHS, CMS, OMB, and 

others considered in reviewing the demonstrations and which are not 

publicly available—did not provide the rationale for the approved 

spending limits, and neither did the publicly available demonstration 

approval letters. The approved 5-year spending limit for Illinois is more 

than $2 billion higher than it would have been had benchmark growth 

rates been applied; Wisconsin’s approved spending limit is $713 million 

more than it would have been with benchmark rates. We estimate that 

over 5 years, with the approved demonstrations, the federal government 

could spend over $1 billion more in Illinois, $416 million more in 

Wisconsin, $55 million more in Florida, and $42 million more in South 

Carolina than without the demonstrations, thus not meeting the stated 

policy of budget neutrality. 
Page 5 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

States’ assumptions about savings that may accrue to Medicaid from the 

Pharmacy Plus demonstrations are not well supported by state experience 

or research. The four states with approved demonstrations assumed that 

the cost of extending drug benefits to seniors now ineligible for Medicaid 

would be offset by savings accrued because demonstration beneficiaries 

would stay relatively healthy and therefore not deplete their income or 

assets to Medicaid eligibility levels. HHS approved the four states’ savings 

assumptions—some projecting significant reductions in overall Medicaid 

senior enrollment and ranging from $480 million to $2 billion per state in 

combined federal and state spending over 5 years—without state-specific 

data supporting these assumptions. One state’s estimate of savings, for 

example, was derived by determining how much the state needed to save 

in order to demonstrate that its proposal would be budget neutral, rather 

than how much the state could realistically expect to save. The limited 

research available indicates that health care savings due to improved 

access to prescription drugs are likely to be much less than what states 

assumed and HHS approved. Had more conservative savings assumptions 

been used to estimate the demonstrations’ costs, the proposals likely 

could not have been approved as budget neutral. Because federal liability 

is capped by a 5-year spending limit for each demonstration, states will be 

at risk if anticipated savings do not accrue and if their demonstration 

spending reaches or exceeds the limits. 

As of February 2004, efforts by the states and HHS to evaluate and monitor 

the Pharmacy Plus demonstrations—and particularly states’ efforts to 

begin implementing their evaluation plans to address stated evaluation 

objectives—were in their early stages. The four states with approved 

demonstrations had taken few steps toward implementing the evaluation 

plans required as a condition of demonstration approval: Florida and 

South Carolina had not decided whether state officials or an outside entity 

would conduct their evaluations. Illinois and Wisconsin officials believed 

that participating in the independent evaluation contracted by HHS and 

started in October 2002 would take the place of their own evaluations. 

HHS officials, by contrast, told us that state evaluations were still required. 

This independent evaluation is scheduled to report by September 2005. 

But in the interim, HHS has not ensured that each state submits in its 

progress reports enough information for HHS to monitor that its 

demonstration is functioning as intended, that the information is in a form 

enabling comparisons across states, or that it is submitted in a timely 

manner. This lack of information limits the department’s oversight 

capability. For example, Illinois did not submit required quarterly progress 

reports during the demonstration’s first year of operation, and its annual 

report did not provide information that would allow HHS to assess 
Page 6 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

whether the new drug benefit was enabling seniors to avoid enrollment for 

full Medicaid benefits. 

HHS’s process for approving Medicaid demonstrations under the 

Pharmacy Plus initiative continues to raise some of the same cost and 

oversight concerns raised by other Medicaid section 1115 waiver 

approvals over the past decade, including a failure to adequately justify the 

basis for states’ spending limits. We are recommending that the Secretary 

of HHS clarify criteria for reviewing and approving demonstration 

spending limits, consider applying these criteria to the four approved 

Pharmacy Plus demonstrations, and publicly document the basis for 

Medicaid section 1115 demonstration approvals to better ensure that 

approved demonstrations will not raise costs to the federal government. 

We are also recommending that the Secretary ensure that approved 

Pharmacy Plus and other Medicaid section 1115 demonstrations fulfill the 

objectives stated in their evaluation plans and more actively monitor 

approved Pharmacy Plus and other Medicaid section 1115 demonstrations. 

In commenting on a draft of this report, HHS concurred with our 

recommendations related to evaluating and monitoring the section 1115 

demonstrations and documenting the basis for demonstration approvals. 

HHS did not concur with our recommendations that it clarify criteria for 

reviewing and approving states’ proposed demonstration spending limits 

and consider applying those criteria to its approval decisions for the four 

Pharmacy Plus demonstrations. HHS indicated that while review criteria 

are important, they cannot always be strictly applied because of variations 

in state Medicaid programs and demonstration proposals, and it also 

stated that the four approved demonstrations were based on wellsupported budget estimates of future state spending. We have on several 

occasions raised concerns with HHS about the budget neutrality of 

particular Medicaid section 1115 demonstrations, and the Pharmacy Plus 

demonstrations are no exception. We acknowledge that variations in state 

demonstration proposals justify some review flexibility but believe that 

HHS has not clearly articulated or documented the rationale for its 

decisions in approving Pharmacy Plus demonstrations. Such lack of clarity 

raises questions about whether these demonstrations, involving billions of 

federal dollars, have been reviewed consistently. 

We also provided a draft of this report to Florida, Illinois, South Carolina, 

and Wisconsin. Illinois and Wisconsin officials commented that we 

overstated the demonstrations’ financial risk to the federal government in 

light of data showing that to date, the demonstrations were operating well 

within their spending limits. Both states asserted that their pharmacy 
Page 7 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

demonstrations were providing a valuable benefit to seniors and would be 

budget neutral. Although we do not dispute the health benefit to seniors of 

expanded access to prescription drugs, demonstrating savings to the 

Medicaid program as a result of this expanded access is a separate issue. 

Assumptions about such potential savings are not well supported by 

research or by data from the states, even though all the states except 

Wisconsin operated state-funded pharmacy assistance programs before 

applying for their demonstrations. Florida commented that the spending 

limit approved for its demonstration was less than 1 percent above the 

benchmark spending level. South Carolina and Wisconsin provided 

technical comments that were incorporated in the report as appropriate. 

Established in 1965 under title XIX of SSA, Medicaid is the nation’s health 

care financing program for low-income families and certain people who 

are age 65 or older or disabled. The program accounted for about 

$244 billion in federal and state expenditures in fiscal year 2002 and 

covered an estimated 53 million people.7

 The states and the federal 

government share Medicaid spending according to a formula that provides 

a more generous federal match for states where per capita income is 

lower.8

Medicaid is an open-ended entitlement program, meaning that the federal 

government is obligated to pay its share of expenditures for all people and 

services covered under an HHS-approved state Medicaid plan. To qualify 

for federal matching payments, state Medicaid programs are required by 

law to cover certain categories of beneficiaries, including pregnant women 

and children with family incomes below specific limits, as well as 

individuals with limited income and assets who are age 65 or older or 

 7

In fiscal year 2001, the latest year for which complete data are available, beneficiaries who 

were aged, blind, or disabled represented about 30 percent of those served by Medicaid but 

accounted for more than 65 percent ($141 billion) of Medicaid’s total $216 billion in federal 

and state spending. Beneficiaries age 65 and older accounted for 26.5 percent of total 

Medicaid spending, or $57 billion; blind or disabled individuals accounted for nearly 39 

percent, or $84 billion. 

8

In fiscal year 2003, the federal share of individual states’ Medicaid expenditures ranged 

from 50 to 77 percent. Federal Medicaid matching rates were increased temporarily 

by 2.95 percentage points from April 1, 2003, through June 30, 2004, pursuant to title IV of 

the Jobs and Growth Tax Relief Reconciliation Act of 2003. See Pub. L. No. 108-27, § 

401(a)(3), 117 Stat. 752, 764-765 (to be codified at 42 U.S.C. § 1396d note). 

Background 
Page 8 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

disabled.9 State programs are also required to cover certain services, 

including physician and hospital services and nursing home care. As long 

as states meet federal requirements and obtain HHS approval for their 

state Medicaid plans, they have considerable flexibility in designing and 

operating their programs. For example, states may choose to expand 

coverage to seniors whose incomes are above statutory limits, and all 

states have opted to provide prescription drug coverage. In addition, 

section 1115 of SSA permits the Secretary of HHS to waive certain 

statutory requirements applicable to Medicaid to allow states to provide 

services or cover individuals not otherwise eligible for Medicaid and to 

provide federal funding for services and populations not usually eligible 

for federal matching payments.10

The Pharmacy Plus initiative allows states to provide a prescription drug 

benefit to certain Medicare beneficiaries, specifically seniors and disabled 

people, with incomes at or below 200 percent of FPL.11 Typically, Medicaid 

eligibility under an approved state plan provides access to all state 

Medicaid-covered services, but eligibility under a Pharmacy Plus 

demonstration covers only a prescription drug benefit.12 The premise 

behind the initiative is that expanded access to medically necessary drugs 

will help keep low-income seniors healthy enough to avoid medical 

expenses that could cause them to “spend down” their resources to the 

 9

Medicaid eligibility is determined by several factors, including individual or family income, 

age, and eligibility for certain other federal benefits. For example, although state Medicaid 

programs vary, most people who are age 65 or older, or are disabled, qualify automatically 

for Medicaid if their incomes and assets qualify them for cash assistance under the federal 

Supplemental Security Income program. 

10In fiscal year 2001, more than 20 percent of total federal Medicaid spending was governed 

by the terms and conditions of section 1115 waivers rather than by standard Medicaid 

program requirements. See Jeanne Lambrew, Section 1115 Waivers in Medicaid and the 

State Children’s Health Insurance Program: An Overview (Washington, D.C.: Kaiser 

Commission on Medicaid and the Uninsured, 2001). 

11In 2003, the annual income that represented 200 percent of FPL was $17,960 for an 

individual, $24,240 for a family of two. 

12States are also required to ensure that beneficiaries receiving only the prescription drug 

benefit have access to primary care services to assist with medical management related to 

pharmacy products, although they are not required to pay for these services. Most 

Pharmacy Plus beneficiaries are seniors covered by Medicare, which generally covers 

hospital and physician services. 
Page 9 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

point of Medicaid eligibility.13 The initiative assumes that budget neutrality 

for pharmacy-only coverage can be achieved by savings to Medicaid from 

fewer seniors’ enrolling for full benefits, as well as from improved access 

to prescription drugs, improved service delivery or medication 

management, and better management of drug benefit costs. 

Unlike some other section 1115 demonstration waivers, the Pharmacy Plus 

initiative requires a participating state to accept a fixed spending limit as 

part of its budget neutrality agreement with HHS. This spending limit—

sometimes called an aggregate spending limit or global budget cap—

applies not only to services and beneficiaries in the state’s demonstration 

drug program, but also to all services for all Medicaid seniors in the state. 

The Pharmacy Plus budget neutrality approach limits the amount the 

federal government will match for a demonstration according to expected 

growth in both service costs and enrollment (see app. I). Once a state has 

reached its Pharmacy Plus spending limit, it cannot receive additional 

federal matching dollars for any Medicaid services for seniors in the state, 

nor can the state restrict enrollment of seniors who qualify for full 

Medicaid benefits.14 Under the Pharmacy Plus scenario, a state accepts the 

financial risks inherent in a fixed budget cap for unanticipated changes in 

both cost and enrollment growth. For some other section 1115 

demonstrations, budget neutrality is based on a projected per capita cost 

for each demonstration beneficiary. This other scenario sets a limit on 

spending per person, but because federal matching funds are available for 

all people who enroll, a state does not have to accept financial risk for 

unexpected growth in enrollment. 

 13To be eligible for Medicaid, seniors must meet income and asset limits specified by each 

state, within federal requirements. Some individuals with income and assets too high to be 

immediately eligible may qualify for coverage on a monthly basis if they incur such high 

medical costs that they “spend down” to a qualifying income and asset level. Such spending 

down often happens when people enter nursing homes and quickly deplete their resources. 

14According to the terms of approval for Pharmacy Plus demonstrations, to maintain budget 

neutrality, states may not alter eligibility or benefits for seniors who qualify for full 

Medicaid. States may pursue a variety of cost-control measures for the drug-only 

expansion, including limiting enrollment and increasing cost sharing for Pharmacy Plus 

beneficiaries. 
Page 10 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

As of May 2004, HHS had approved four states’ Pharmacy Plus 

demonstration proposals, denied two, and considered proposals from nine 

other states. All four approved demonstrations—Florida, Illinois, South 

Carolina, and Wisconsin—are to operate for 5 years, during which time 

they might enroll a total of half a million low-income individuals age 65 or 

older for the new prescription drug coverage. HHS denied two 

demonstration proposals, from Delaware and Hawaii, because they were 

not consistent with Pharmacy Plus guidelines. Of the remaining nine 

proposals, one was withdrawn by the state and others have been on hold 

since fall 2003, when Congress was considering Medicare prescription 

drug legislation. At the time we completed our work, legislation providing 

a new drug benefit through Medicare had been enacted, but HHS had not 

determined how the new drug program would affect the Pharmacy Plus 

initiative. 

HHS has approved Pharmacy Plus demonstrations for low-income seniors 

in four states: Florida, Illinois, South Carolina, and Wisconsin.15 As of May 

2004, all four demonstrations had been implemented and under way for at 

least 17 months: Illinois’, Florida’s, and Wisconsin’s demonstrations were 

implemented in 2002, South Carolina’s in 2003 (see table 1). Together, the 

four approved demonstrations are projected to enroll as many as 527,800 

individuals for Medicaid prescription drug benefits only; as of April 2004, 

they reported combined enrollment of nearly 372,200 people. Illinois’ 

demonstration is the largest, with expected enrollment for the drug benefit 

of more than 250,000 seniors over 5 years. As of April 2004, more than 

192,600 people were enrolled in Illinois’ demonstration, the majority of 

them moved into the Medicaid program from an existing state-funded 

pharmacy assistance program.16

 15HHS approved a fifth demonstration proposal, from Indiana, in April 2003, but the state 

declined to accept the terms of HHS’s approval, primarily because of the state’s concerns 

about the spending limit for all Medicaid seniors. Instead, Indiana proposed a different 

budget approach that would not require the state to project and commit to a spending limit 

covering all Medicaid seniors. Indiana’s alternative proposal, submitted May 2003, was one 

of the nine proposals under consideration by HHS as of March 2004. 

16Illinois’ state-funded program covered seniors and people with disabilities with incomes 

up to 250 percent of FPL. Participants who were 65 or older with incomes at or below 

200 percent of FPL were automatically enrolled in the demonstration on June 1, 2002. 

Eligible seniors with incomes from 201 to 250 percent of FPL and people with disabilities 

continue to be covered by the state-funded program. 

HHS Has Reviewed 15 

Pharmacy Plus 

Proposals and 

Approved 4 

HHS Approved Four 

Pharmacy Plus 

Demonstrations 
Page 11 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

Table 1: Highlights of Pharmacy Plus Demonstrations Approved as of May 2004 

State and demonstration status 

(in order of approval) Description 

Illinois

Approved January 2002 

Implemented June 2002 

Request for amendment submitted 

March 2003 

Projected enrollment: As many as 256,500 seniors with incomes at or below 

200 percent of FPL; 192,600 participants enrolled as of April 2004. Seniors with incomes 

at or below 200 percent of FPL who were participating in Illinois’ previous state-funded 

program were automatically enrolled in the demonstration. 

Spending limit for all Medicaid seniors: $14.0 billion in federal and state Medicaid 

funding over 5 years; prescription drug benefit represents $1.4 billion. 

Benefits and cost sharing: Covers most prescription and some over-the-counter drugs 

recommended by physicians. Seniors with private insurance may choose to enroll for a 

$25 monthly rebate program. No cost sharing for participants with incomes below 100 

percent of FPL; participants at or above 100 percent of FPL pay $1 for generic and $4 

for brand-name drugs. All participants pay 20 percent coinsurance after their annual 

drug benefits under the program exceed $1,750. 

State program: Before the demonstration, Illinois’ state-funded pharmacy assistance 

program enrolled about 170,000 participants. The state continues to operate a statefunded program covering prescription drugs for specified conditions for seniors with 

incomes from 201 to 250 percent of FPL and for people with disabilities and incomes up 

to 250 percent of FPL. Amendment sought to expand coverage to eligible seniors with 

incomes at or below 250 percent of FPL; amendment was pending as of March 2004. 

Florida

Approved July 2002 

Implemented August 2002 

Request for amendment submitted 

September 2003 

Projected enrollment: As many as 58,500 seniors with incomes from 88 to 

120 percent of FPL; 54,400 participants enrolled as of April 2004. 

Spending limit for all Medicaid seniors: $16.7 billion in federal and state Medicaid 

funding over 5 years; prescription drug benefit represents $477 million. 

Benefits and cost sharing: Covers all prescription drugs up to a monthly benefit limit of 

$160 per participant. Except for some classes of drugs, such as mental health and HIV 

antiviral therapies, brand-name drugs are limited to four per month, although physicians 

are allowed to request exceptions. Participants pay $2 for generic drugs, $5 for drugs on 

the state’s preferred drug list, and $15 for other brand-name drugs. 

State program: Before the demonstration, Florida’s state-funded pharmacy assistance 

program enrolled about 9,000 participants. Replaced by the demonstration, the statefunded program had the same income eligibility criteria as the demonstration but a lower 

benefit limit: $80 per participant per month. Amendment sought to expand eligibility to 

seniors with incomes at or below 

200 percent of FPL and to add a prescription drug discount program; amendment was 

pending as of March 2004. 
Page 12 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

State and demonstration status 

(in order of approval) Description 

Wisconsin

Approved July 2002 

Implemented September 2002 

Projected enrollment: As many as 146,800 seniors with incomes at or below 

200 percent of FPL; 70,300 participants enrolled as of April 2004. 

Spending limit for all Medicaid seniors: $8.4 billion in federal and state Medicaid 

funding over 5 years; prescription drug benefit represents $919 million. 

Benefits and cost sharing: Covers prescription drugs, including insulin. Participants 

pay an annual enrollment fee of $30 and those with incomes above 160 percent of FPL 

pay an annual deductible of $500. Participants pay $5 for generic and $15 for brandname drugs (those with incomes from 160 to 

200 percent of FPL begin co-payments after meeting the required deductible). 

State program: Wisconsin did not have a state-funded pharmacy assistance program 

for seniors before this demonstration. When the state implemented the demonstration, it 

also began offering state-funded pharmacy benefits to seniors with incomes from 201 to 

240 percent of FPL. 

South Carolina

Approved July 2002 

Implemented January 2003 

Projected enrollment: As many as 66,000 seniors with incomes up to 

200 percent of FPL; 54,900 enrolled as of April 2004. 

Spending limit for all Medicaid seniors: $5.0 billion in federal and state Medicaid 

funding over 5 years; prescription drug benefit represents $764.7 million. 

Benefits and cost sharing: Covers generic and, when no generic is available, brandname prescription drugs, over-the-counter drugs prescribed by physicians, insulin and 

other self-injected drugs, and syringes. Except for medications for specified conditions, 

including behavioral health disorders, cardiac disease, cancer, HIV/AIDS, and terminal 

or life-threatening diseases, coverage limited to four prescriptions or refills per month. 

Participants pay an annual deductible of $500, plus $10 for generic drugs; $15 for brandname drugs; and $21 for drugs requiring prior authorization. 

State program: Before the demonstration, South Carolina’s state-funded pharmacy 

assistance program enrolled about 41,000 participants. Demonstration replaces that 

program and expands eligibility to seniors with incomes from 175 up to 200 percent of 

FPL. 

Source: GAO analysis of state and HHS documents. 

All the demonstrations except Florida’s are approved to enroll seniors 

with incomes at or below 200 percent of FPL, the maximum eligible 

income established in HHS’s Pharmacy Plus guidance.17 As approved, 

Florida’s demonstration covers seniors with incomes from 88 to 

120 percent of FPL, but in September 2003, the state submitted an 

amendment to expand income eligibility to 200 percent of FPL. Illinois 

also applied in March 2003 to amend its approved demonstration to 

expand eligibility, in its case to include seniors with incomes at or below 

250 percent of FPL. The terms of Illinois’ demonstration approval 

 17Although HHS has identified the initiative’s target population as seniors and people with 

disabilities who have incomes at or below 200 percent of FPL, none of the states with 

approved pharmacy demonstrations have chosen to include people with disabilities. 
Page 13 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

specifically permit the state to seek this amendment, as long as the state 

submits data supporting its ability to cover this expansion population at no 

additional cost to the federal government. As of March 2004, HHS was 

reviewing both amendments. 

Projected 5-year costs vary among the four approved demonstrations. For 

Florida, Illinois, South Carolina, and Wisconsin, total combined federal 

and state Medicaid spending on the new drug benefit alone is expected to 

be more than $3.6 billion over 5 years, of which the federal share would be 

approximately $2.1 billion. The combined federal and state Medicaid 

spending limits for the four demonstrations—for services to all Medicaid 

seniors in the four states—would total $44 billion over 5 years, with a 

federal share of at least $25 billion. The estimated 5-year costs solely for 

the drug benefit range from $477 million in Florida to $1.4 billion in 

Illinois, and combined 5-year federal and state spending limits (based on 

projected costs for services to all Medicaid seniors) range from $5.0 billion 

in South Carolina to $16.7 billion in Florida. 

When they applied, three of the four states with approved demonstrations 

already operated state-funded pharmacy assistance programs for seniors. 

Most beneficiaries eligible for these programs are also eligible for 

Pharmacy Plus coverage. HHS allows the states to subsume all or a 

portion of an existing program under a demonstration, as long as the 

states’ demonstrations propose to expand either the number of 

beneficiaries or the scope of drug coverage.18 In other words, the state may 

not simply secure federal matching dollars for the costs of an existing 

state-funded drug program with no expansion. To meet this condition, 

states with approved demonstrations either raised income eligibility 

thresholds or expanded the scope of drug coverage beyond that of their 

existing state programs. For example, Florida doubled its maximum 

monthly benefit from $80 to $160 per person, and South Carolina 

expanded eligibility to include seniors with incomes from 175 through 

200 percent of FPL. Illinois’ demonstration offered a more comprehensive 

 18The Pharmacy Plus application form and standard terms and conditions for three of the 

four approved demonstrations do not include a specific maintenance-of-effort requirement. 

Only Illinois, the first Pharmacy Plus demonstration approved, has such a maintenance-ofeffort requirement. HHS officials told us that the department’s policy regarding state 

maintenance of effort has been evolving. Since the Illinois approval, the officials told us 

that they have asked states to demonstrate that they are expanding their programs. 
Page 14 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

drug benefit than its state-funded program did.19 Wisconsin did not 

previously have a state-funded pharmacy assistance program for seniors.20

In 2003, HHS denied Pharmacy Plus demonstration proposals from two 

states, Delaware and Hawaii. (See app. II for descriptions of denied, 

withdrawn, and pending proposals.) Delaware’s proposal was denied 

primarily because HHS required that the state expand beyond the existing 

state-funded program and limit coverage to seniors with incomes at or 

below 200 percent of FPL. Delaware’s state-funded pharmacy assistance 

program already covered seniors and disabled adults with incomes up to 

200 percent of FPL or whose prescription drug costs exceeded 40 percent 

of their annual incomes. For this reason, the state could not expand either 

eligibility or coverage and stay within Pharmacy Plus guidelines. Although 

Delaware proposed adding a pharmacy benefit management component to 

monitor appropriate prescription use and to control costs, HHS found this 

proposed change to the existing program insufficient.21

Hawaii proposed to make prescription drugs available at the discounted 

Medicaid rate to state residents of all ages with family incomes at or below 

300 percent of FPL. This benefit was to be funded through participant cost 

sharing, manufacturer rebates, and a fixed state contribution of $1 per 

prescription. HHS’s denial was based primarily on the request to cover 

individuals with incomes up to 300 percent instead of 200 percent of FPL. 

Other reasons for the denial included the proposed coverage for all state 

residents, instead of targeting seniors and people with disabilities, and the 

 19Illinois’ state-funded program began in 1985 to cover prescriptions for cardiovascular 

disease and has expanded over the years to include drugs for several conditions, including 

arthritis, diabetes, Alzheimer’s disease, cancer, glaucoma, lung disease, and Parkinson’s 

disease. 

20Wisconsin began offering state-funded drug benefits to seniors with incomes from 200 up 

to and including 240 percent of FPL at the same time that it implemented its 

demonstration. 

21A Delaware Medicaid official expressed concern that HHS’s denial was inconsistent with 

its guidelines, which, as set forth in the application form, indicate that states may be 

allowed to provide enhanced pharmacy benefit management services as one option for 

expanding state-funded programs under the demonstration. HHS officials told us that the 

denial of Delaware’s proposal would not be reconsidered because the proposed expansion 

was not large enough, and approving it would simply make the state-funded program 

eligible for federal matching payments. 

HHS Denied Two 

Demonstration Proposals 
Page 15 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

minimal state financial participation of $1 per prescription in the first year 

of the demonstration.22

From January 2002 through May 2004, HHS considered Pharmacy Plus 

demonstration proposals from nine other states: Arkansas, Connecticut, 

Indiana, Maine, Massachusetts, Michigan, New Jersey, North Carolina, and 

Rhode Island. As of May 2004, eight were still pending; one proposal, from 

Massachusetts, had been withdrawn. Most proposals would cover seniors 

with incomes at or below 200 percent of FPL; several would also cover 

adults with disabilities. The drug benefits would generally be 

comprehensive and require participant cost sharing, which in some cases 

would include an annual enrollment fee and 20 percent co-payment for 

each prescription. All but one of the states with pending proposals have 

state-funded pharmacy assistance programs that they propose to include 

in whole or in part in their demonstrations. (App. II describes these 

demonstration proposals.) 

As of May 2004, most of the pending proposals were not under active 

review by HHS primarily because the department had not determined the 

effect of the Medicare prescription drug legislation on the Pharmacy Plus 

demonstration proposals. HHS officials told us in October 2003 that 

Arkansas, Rhode Island, and Indiana officials had asked that review of 

their states’ proposals be put on hold until after Congress had completed 

consideration of the Medicare legislation. At that time HHS was still 

reviewing a proposal from North Carolina but regarded proposals from 

four other states as inactive because longtime negotiations with those 

states had reached an impasse. Connecticut and New Jersey, for example, 

already had broad state-funded drug coverage for seniors with incomes up 

to 200 percent of FPL. In such cases, HHS has been unwilling to approve 

federal financing for existing state-funded programs. 

The Medicare Prescription Drug, Improvement, and Modernization Act of 

2003 (MMA) will provide seniors access to a Medicare-covered 

prescription drug benefit and will likely affect how HHS and the states 

manage the Medicaid Pharmacy Plus initiative. This law gives Medicare 

 22A Hawaii Medicaid official reported that the agency was unable to fundamentally change 

the nature of the proposal during HHS review because the proposal had been outlined in 

state law. 

HHS Has Considered Nine 

Other Demonstration 

Proposals 

Medicare Prescription 

Drug Legislation May 

Affect Pharmacy Plus 

Initiative 
Page 16 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

beneficiaries the opportunity to enroll for prescription drug coverage to 

begin on January 1, 2006, and, as an interim measure, the opportunity to 

enroll for Medicare-endorsed drug discount cards beginning in June 2004. 

It also directs HHS to establish effective coordination between Medicare 

plans and state Medicaid and pharmacy assistance programs and to 

establish a commission to address these and other transition issues.23 In 

2006, the Medicare drug benefit will replace Medicaid as the primary 

source of prescription drug coverage for low-income seniors who would 

have been eligible for both full benefits under Medicaid and drug benefits 

under Medicare plans.24 Under MMA, individuals with limited assets and 

incomes below 150 percent of FPL will be eligible for federal subsidies to 

assist with the drug benefit’s cost-sharing requirements.25 But because 

Pharmacy Plus demonstrations in Illinois, South Carolina, and Wisconsin 

cover individuals with incomes above 150 percent and at or below 

200 percent of FPL regardless of other assets, some current demonstration 

beneficiaries may not qualify for these subsidies. Pharmacy Plus 

beneficiaries are likewise ineligible for the Medicare drug discount cards.26

 23Specifically, the law establishes a State Pharmaceutical Assistance Transition 

Commission to develop a proposal for addressing the transitional issues facing statefunded pharmacy assistance programs and their participants because of implementation of 

the new Medicare prescription drug benefit. Members of the commission are to include 

representatives of states operating pharmacy benefit programs, interested organizations, 

private insurers, and others. The commission is required to submit a detailed proposal, 

including specific legislative or administrative recommendations, to Congress and the 

President by January 1, 2005. See Pub. L. No. 108-173, § 101(a), 117 Stat. 2071, 2128-31 

(adding sections 1860D-23 and 1860D-24 to SSA) (to be codified at 42 U.S.C. §§ 1395w-133 

and 1395w-134); see also section 106, 117 Stat. 2168-9. 

24See Section 103(c), 117 Stat. 2158 (amending section 1935 of SSA) (to be codified at 42 

U.S.C. § 1396n-5). 

25For example, individuals with incomes below 135 percent of FPL generally will be entitled 

to a full premium subsidy; individuals with incomes up to 150 percent of FPL will be 

entitled to an income-related premium subsidy determined on a sliding scale. In addition, 

after reaching an out-of-pocket threshold of $3,600, individuals with incomes below 

135 percent of FPL will have no co-payment for covered drugs, while those with incomes 

below 150 percent of FPL will pay either $2 or $5 for each drug. See Section 101(a), 117 

Stat. 2107-9 (adding sections 1860D-14(a)(1) and (2) to SSA) (to be codified at 42 U.S.C. §§ 

1395w-114(a)(1) and (2)); see also section 101(a), 117 Stat. 2077-9 (adding section 1860D2(b)(4) to SSA) (to be codified at 42 U.S.C. § 1395w-102(b)(4)). 

26See Section 101(a), 117 Stat. 2132-3 (adding section 1860D-31(b) to SSA) (to be codified at 

42 U.S.C. § 1395w-141(b)). 
Page 17 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

As of May 2004, HHS indicated it was considering how enactment of the 

new law would affect Pharmacy Plus demonstrations and proposals.27

Officials from the four states with approved demonstrations told us in 

December 2003 that they were uncertain how the law would affect their 

demonstrations, but they had no plans to end the demonstrations early. 

After the Medicare prescription drug benefit begins in 2006, some 

demonstrations could be discontinued or modified. Early termination 

could have an impact on the demonstrations’ budget neutrality, which 

often depends on savings in later years to offset higher start-up costs. 

Officials in Illinois and Florida indicated in December 2003 that their 

pharmacy demonstrations might be converted to state-funded programs in 

2006. 

HHS has not adequately ensured that the spending limits it has approved 

for Pharmacy Plus demonstrations will be budget neutral—in other words, 

that the federal government will spend no more under the demonstrations 

than without them. For all four demonstrations, HHS approved 5-year 

spending limits based on projections of cost and beneficiary enrollment 

growth that exceeded benchmarks that department officials told us they 

considered in assessing the reasonableness of states’ demonstration 

proposals. These cost and enrollment growth benchmarks incorporate 

states’ historical experience and expectations for Medicaid program 

growth nationwide. The discrepancies between the growth benchmarks 

and the approved growth rates were greatest for Illinois and Wisconsin. 

Neither HHS’s negotiations with the states nor the department’s rationale 

for approving higher-than-benchmark growth rates is well documented. 

Had HHS based the 5-year demonstration spending limits on the 

benchmark growth rates, the federal share of approved spending would be 

considerably lower, particularly for Illinois and Wisconsin: specifically, 

 27In commenting on a draft of this report, HHS said that it expected less need for Pharmacy 

Plus demonstrations when Medicare coverage for prescription drugs is expanded under 

MMA and that states would need to decide if they want to continue their demonstrations. 

HHS Has Not Ensured 

That Approved 

Demonstrations’ 

Spending Limits Will 

Be Budget Neutral 
Page 18 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

$1 billion lower in Illinois and $416 million lower in Wisconsin.28 For 

Florida and South Carolina, the federal share of approved spending would 

have been $55 million and $42 million lower, respectively. 

HHS based the Pharmacy Plus demonstration spending limits it approved 

on a range of estimated future growth rates for cost per beneficiary and 

for enrollment, which in some cases exceeded benchmarks29 the 

department told us it considered in assessing the reasonableness of states’ 

proposals. A standard Pharmacy Plus application form developed by HHS 

and a technical guidance document are the chief sources of criteria and 

formal guidance to states for developing demonstration proposals. But 

HHS has not established written criteria for how it reviews and approves 

the growth rates that states propose. These growth rates are key elements 

in the budget neutrality negotiations between states and the federal 

government because higher rates result in more generous spending limits, 

which represent the federal government’s agreed-on maximum spending 

for all the states’ Medicaid seniors during the demonstrations. An 

inappropriately high spending level can represent a higher federal liability 

than warranted. 

The process used by HHS and the states to determine whether states’ 

proposed Pharmacy Plus demonstrations will be budget neutral requires 

comparing two cost estimates: (1) projected 5-year costs of a state’s 

existing Medicaid program for seniors (“without-demonstration costs”) 

and (2) projected 5-year costs of the state’s existing program plus the drug 

benefits and beneficiaries added by the demonstration (“withdemonstration costs”). These calculations factor in projected growth in 

 28We have reported that by allowing Illinois to include impermissible costs in its projected 

spending under the Medicaid program without the demonstration, HHS approved a 

Pharmacy Plus demonstration in the state that was not budget neutral, inappropriately 

raising allowed costs for the project by $275 million. We recommended to the Secretary of 

HHS that the agency ensure that valid methods are used to demonstrate budget neutrality 

and that it apply such methods to adjust the federal spending commitment under Illinois’ 

demonstration. See U.S. General Accounting Office, Medicaid and SCHIP: Recent HHS 

Approvals of Demonstration Waiver Projects Raise Concerns, GAO-02-817 (Washington, 

D.C.: July 12, 2002). As of March 2004, HHS had not adjusted the state’s spending limit. 

29We use the term “benchmark” throughout this report to describe the cost and Medicaid 

enrollment growth rates HHS considered when making its approval decisions for Pharmacy 

Plus demonstrations. We use “benchmark” rather than “criterion” because, in contrast to its 

practice in approving some other section 1115 demonstrations, HHS did not have written 

cost or enrollment growth criteria for Pharmacy Plus. 

HHS Approved Projected 

Growth Rates Exceeding 

Benchmarks 
Page 19 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

costs and enrollment each year. As long as projected with-demonstration 

costs do not exceed projected without-demonstration costs, the 

demonstration can be approved as budget neutral. As a result, the 

projected costs of a state’s existing, without-waiver Medicaid program for 

seniors effectively sets the spending limit for all services provided to all 

Medicaid seniors in the state for the 5-year demonstration term. 

Appendix I outlines the basic steps HHS follows in setting Pharmacy Plus 

demonstration spending limits. 

To determine budget neutral spending limits for the pharmacy 

demonstrations, HHS officials told us they consider the following for 

estimating growth in costs and enrollment through the course of the 

demonstrations: 

• For cost growth per beneficiary, similar to guidelines for other types of 

section 1115 demonstrations,30 HHS seeks to approve a growth rate equal 

to the lower of either the state’s historical average annual growth in perbeneficiary cost (that is, the average annual rate for the 5 years before the 

demonstration proposal) or the nationwide projected growth rate, 

developed by CMS’s Office of the Actuary, for Medicaid cost per 

beneficiary age 65 or older.31

• For enrollment growth, HHS considers the state’s historical average 

annual growth in enrollment as a starting point and, to a lesser extent, the 

CMS Actuary’s nationwide rate, but it allows states to present a rationale 

for a higher rate that anticipates rising future enrollments. 

HHS’s approved growth rates in some cases exceeded these benchmarks 

(see table 2). For per-beneficiary cost growth rates in Florida, Illinois, and 

Wisconsin, HHS did not approve the lower of either the state’s historical 

 30The Health Insurance Flexibility and Accountability (HIFA) initiative, for example, 

another Medicaid section 1115 demonstration waiver initiative, specifies a similar 

benchmark for cost growth per beneficiary in its standard application form. The HIFA 

initiative provides two options for projecting cost growth per beneficiary: the Medical Care 

Consumer Price Index, developed by the Bureau of Labor Statistics, or a state-specific 

projection of what the program would have cost without the demonstration. For the 

second option, HHS policy is to apply the lower of state-specific experience—using 5 years 

of Medicaid data—or the CMS Actuary’s Medicaid baseline for the eligible groups covered 

by the demonstration. 

31The CMS Actuary’s growth projections in effect during budget discussions for the four 

approved Pharmacy Plus demonstrations were a 6.3 percent annual increase in cost per 

beneficiary and a 1.8 percent annual increase in enrollment. 
Page 20 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

average rate or the CMS Actuary’s rate of 6.3 percent. Similarly, for 

beneficiary enrollment growth rates, HHS approved rates for Illinois and 

Wisconsin that exceeded both the states’ historical experience and the 

CMS Actuary’s 1.8 percent projected annual growth rate. In Illinois’ case, 

the approved rate for beneficiary enrollment growth—5 percent per year 

over the 5-year demonstration—was considerably higher than the state’s 

5-year historical average enrollment growth of 1.6 percent per year. 

Table 2: HHS-Approved, State Historical, and CMS Actuary Growth Rates 

Annual growth rates in percent 

Cost growth rates Enrollment growth rates 

State 

HHSapproved

State 

historical 

average

CMS 

Actuary 

HHSapproved 

State 

historical 

average

CMS 

Actuary

Florida 6.5 6.5 6.3 1.4 1.4 1.8

Illinoisa 5.5 4.5 6.3 5.0 1.6 1.8

South Carolinab 6.3 10.0 6.3 1.0 0.7 1.8

Wisconsin 6.3 5.4 6.3 2.0 0.01c1.8

Source: GAO analysis of HHS and state documents. 

a

The state historical average rates for Illinois (4.5 percent cost growth and 1.6 percent enrollment 

growth) reflect updated information provided by the state to HHS shortly before its approval decision 

on January 28, 2002. This information does not appear in the demonstration application that was 

submitted on July 31, 2001. 

b

For South Carolina, historical average rates reflect 3 years of data, rather than the generally required 

5 years, because cost and enrollment data for Medicaid seniors were incomplete for 2 of the 5 years 

(data for certain long-term care waivers for seniors were not included). 

c

This figure is lower than the 0.12 percent enrollment growth rate Wisconsin proposed in its 

demonstration application. We included 5 years of data in calculating our average rate for the state, 

while the state itself averaged 3 years of data, excluding 2 years when enrollment declined slightly. 

HHS’s basis is unclear for approving growth rates higher than the 

benchmarks in some cases, particularly for approving higher enrollment 

growth rates for Illinois and Wisconsin. The department’s negotiation 

process with these two states, during which officials reached agreement 

on allowed growth rates, was not documented, nor was its rationale for 

approving rates that differed from the lower of state historical experience 

or the CMS Actuary’s projections. In particular, HHS’s internal decision 

memorandums—which described the factors that HHS, CMS, OMB, and 

others considered in reviewing the demonstrations and which are not 

publicly available—did not provide the rationale for the approved 

spending limits, and neither did the publicly available demonstration 

approval letters. 

Basis for Approved 

Spending Limits Not Clear 

or Well Documented 
Page 21 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

HHS and state officials told us that Illinois and Wisconsin used a variety of 

arguments to convince the department that their situations warranted 

higher enrollment growth rates. But the states provided little specific 

documentation to HHS or to us to support these arguments. For example: 

• Illinois asserted that its projected annual enrollment growth rate for the 

demonstration years from 2002 through 2007 should be significantly higher 

than its 5-year average historical growth rate of 1.6 percent, because 

income eligibility levels for seniors in its Medicaid program increased from 

41 to 100 percent of FPL from July 2000 through July 2002. As support, the 

state provided HHS with updated Medicaid enrollment data—which were 

more recent than those included in the original demonstration application 

and showed increased growth rates for seniors compared with earlier 

years—but these rates were still lower than the 5 percent HHS approved 

and did not raise the historical average to 5 percent.32 The state did not 

provide documents with actuarial projections of the estimated number of 

people expected to enroll in Medicaid because of the change in eligibility 

criteria. Illinois justified applying the 5 percent annual growth rate to all 

5 years of the pharmacy demonstration by providing a chart showing that 

enrollment in a different state program, SCHIP, had grown more than 

5 percent per year on average for 3 years after that program’s eligibility 

criteria were expanded. In our view, however, Illinois’ SCHIP enrollment 

experience with children does not provide a reasonable basis for 

predicting enrollment by seniors in the Pharmacy Plus demonstration. 

• Wisconsin asserted that its projected annual enrollment growth rate for 

the demonstration years should be significantly higher than either its 

5-year unadjusted historical growth rate of 0.01 percent or the 0.12 percent 

rate based on 3 years of historical data reported in its application because 

of the anticipated effects of a nationwide Social Security Administration 

mail outreach program to low-income Medicare beneficiaries. This 

outreach program informed seniors enrolled in Medicare about other 

benefits, including Medicaid assistance for Medicare cost-sharing 

 32Illinois provided HHS with updated information on senior enrollment in the state’s 

Medicaid program, including growth of 1.3 percent between state fiscal years 1999 and 2000 

and 4.2 percent between state fiscal years 2000 and 2001. These updated figures are 

incorporated in the 5-year historical average enrollment growth rate of 1.6 percent, 

covering state fiscal years 1997 through 2001. 
Page 22 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

requirements, for which they might qualify.33 Wisconsin officials told us 

they proposed a 4 percent future annual enrollment growth rate for 

seniors in the expectation that this outreach program, along with factors 

including an aging population and the economic downturn, would increase 

Medicaid enrollment. According to HHS, Wisconsin did not document any 

projections of how many newly eligible Medicaid individuals could be 

prompted to enroll after the Social Security Administration outreach 

mailing. Instead, it submitted information based on a review of a similar 

outreach effort in Minnesota. According to Wisconsin state officials, 

during negotiations HHS proposed 1 percent as a more reasonable growth 

rate, and HHS and state officials agreed to an approved enrollment growth 

rate of 2 percent per year. Our related work suggests that Wisconsin may 

be justified in claiming some increase in Medicaid enrollment as a result of 

the outreach program, but the effect appears to be less than 1 percent. 

Notably, although the Social Security Administration mail outreach 

program was nationwide, HHS did not consider its effects when approving 

enrollment rates for other states.34

Application of benchmark rates for projected per-beneficiary cost and 

enrollment growth would have produced lower spending limits for all four 

approved Pharmacy Plus demonstrations (see table 3). Benchmark-based 

limits on combined federal and state spending would be approximately 

$3 billion lower over 5 years than what HHS approved for the four 

demonstrations, and the federal share alone would come to about 

$1.6 billion less. The higher-than-benchmark growth rates HHS approved 

for Illinois and Wisconsin accounted for most of these differences. Had the 

 33The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 

requires the Social Security Administration to notify Medicare beneficiaries nationwide 

about other benefits, including Medicaid, for which they could potentially be eligible. See 

Pub. L. No. 106-554, App. F, § 911(a), 114 Stat. 2763, 2763A-583 (adding section 1144 to SSA) 

(to be codified at 42 U.S.C. § 1320b-14). See U.S. General Accounting Office, Medicare 

Savings Programs: Results of Social Security Administration’s 2002 Outreach to LowIncome Beneficiaries, GAO-04-363 (Washington, D.C.: Mar. 26, 2004). 

34See GAO-04-363. In 2002, the Social Security Administration outreach program sent letters 

to about 16.4 million low-income Medicare beneficiaries nationwide, yielding an estimated 

74,000 additional individuals—a further increase in enrollment of 0.5 percent—enrolling in 

Medicaid programs that help low-income Medicare beneficiaries pay their Medicare 

premiums and, in some cases, their deductibles and coinsurance. On the basis of a sample, 

we estimated that Wisconsin experienced a statistically significant increase in additional 

Medicaid enrollment after the Social Security Administration mailing, although at 

0.4 percent, the response was slightly less than the U.S. average. The Social Security 

Administration outreach program continued on a smaller scale in 2003 and thereafter. 

Demonstration Spending 

Limits Would Be Lower if 

Based on Benchmark 

Rates 
Page 23 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

spending limit for Illinois’ demonstration, in particular, been based strictly 

on the benchmark rates, combined federal and state spending would have 

been almost $2.2 billion, or 15 percent, lower, and the federal 

government’s liability under the demonstration (at the state’s 50 percent 

federal matching rate) lower by more than $1 billion. The difference is less 

pronounced for Wisconsin, where the approved federal and state spending 

limit exceeds what it would have been had benchmark rates been applied 

by about $713 million, translating into about $416 million in additional 

federal spending. 

Table 3: HHS-Approved and Benchmark 5-Year Spending Limits 

Dollars in millions 

States HHS-approved Benchmark

Dollar difference

(percentage 

difference)a

Federal share of 

differenceb

Florida $16,669 $16,575 $94 (0.6) $55

Illinois 14,047 11,880 2,167 (15.4) 1,083

South Carolina 4,962 4,902 60 (1.2) 42

Wisconsin 8,378 7,666 713 (8.5) 416

Totala $44,056 $41,023 $3,033 (6.9) $1,596

Source: GAO analysis of HHS and state documents. 

Notes: Figures reflect total approved federal and state spending limits for all Medicaid services for 

seniors over the 5 years of each demonstration, including spending on new Pharmacy Plus 

prescription drug benefits. We calculated benchmark spending limits using, for cost growth per 

beneficiary, the lower of either the state’s historical average cost growth rate or the CMS Actuary’s 

projected rate, and for enrollment growth, the state’s unadjusted 5-year historical average enrollment 

growth rate, except for South Carolina, where we used the average of 3 years’ data. 

a

Dollar differences and totals are based on numbers before rounding. 

b

Federal share calculated by applying fiscal year 2003 federal Medicaid matching rates for each state 

to the dollar difference for that state: Florida, 58.8 percent; Illinois, 50 percent; South Carolina, 

69.8 percent; and Wisconsin, 58.4 percent. 

The spending limits HHS approved for Illinois and Wisconsin exceed 

estimates based on consistent application of the benchmark growth rates 

by 15.4 percent and 8.5 percent, respectively.35 The limits approved for 

 35We calculated Wisconsin’s benchmark spending limit based on the 0.01 percent average 

annual enrollment growth rate for 5 years of historical data, which included 2 years when 

enrollment declined slightly. Had the 0.12 percent average annual enrollment growth rate 

been used, based on 3 years of historical data as the state proposed in its demonstration 

application, Wisconsin’s combined federal and state spending limit would have been 

$7.9 billion, about 5.7 percent, or $477 million, below what HHS approved. 
Page 24 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

Florida and South Carolina, while not budget neutral compared with the 

benchmark spending estimates, reflect relatively small differences. 

Florida’s approved spending limit exceeds the benchmark estimate by less 

than 1 percent—$94 million of a 5-year approved federal and state 

spending limit of nearly $16.7 billion—and South Carolina’s approved 

spending limit exceeds the benchmark by 1.2 percent, or $60 million. 

CBO has similarly reported that Pharmacy Plus demonstrations are likely 

to increase federal Medicaid spending. Before passage of MMA, CBO 

estimated that the Pharmacy Plus demonstrations would add about 

$18 billion to federal Medicaid spending over the 10 years from 2004 

through 2013. According to CBO officials, the agency considered a range 

of scenarios for how the initiative might grow with new demonstration 

approvals and estimated the initiative’s overall effect on Medicaid 

spending.36 The officials told us that CBO did not include any of the 

demonstrations’ projected savings in its analysis because it did not find the 

argument that savings would occur convincing. 

Neither data from state experience nor other research supports the 

savings assumptions necessary for budget neutrality in the Pharmacy Plus 

demonstrations. In developing their demonstration proposals, states 

assumed that keeping low-income seniors healthy—thus preventing them 

from spending down their financial resources on health services and 

“diverting” them from Medicaid eligibility—would generate savings to help 

offset the increased costs of providing a new drug benefit. Without statespecific evidence, HHS approved savings assumptions negotiated with the 

states, including significant projected reductions in Medicaid senior 

enrollment. But the limited research available suggests that potential 

health care savings due to improved access to prescription drugs are likely 

to be much less than the levels the states assumed and HHS approved. Had 

more conservative savings assumptions been used to estimate the 

demonstrations’ costs, the proposals likely could not have been approved 

as budget neutral. Moreover, concerns have arisen about what actions 

states might take to control spending on behalf of seniors if estimated 

 36According to CBO officials, the agency did not analyze the cost impact of individual 

Pharmacy Plus demonstrations but estimated potential impact on Medicaid spending 

overall under various growth scenarios. CBO estimated that roughly 1.2 million people 

would join the Medicaid rolls for the prescription drug benefit only. See U.S. Congressional 

Budget Office, An Analysis of the President’s Budgetary Proposals for Fiscal Year 2004: 

An Interim Report (Washington, D.C.: March 2003). 

Pharmacy Plus 

Savings Assumptions 

Not Well Supported 
Page 25 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

savings do not accrue and states reach or exceed their spending limits 

under the demonstrations. 

The approved Pharmacy Plus demonstrations count on expected savings 

based on reductions in the projected number of seniors who will enroll in 

states’ Medicaid programs—ranging from a 3 percent reduction in Florida 

to a 25 percent reduction in South Carolina over the demonstrations’ 

5 years. The dollar amounts of combined federal and state savings 

projected under these assumptions in the demonstrations’ budget 

neutrality calculations range from $480 million in Florida to $2 billion in 

Illinois (see table 4). 

Table 4: States’ Projections of Medicaid Senior Populations after 5 Years, with and without HHS-Approved Pharmacy Plus 

Demonstrations 

Projections Florida Illinois South Carolina Wisconsin

Total projected Medicaid seniors, without demonstration, by year 5 210,200 186,683 90,006 70,412

Total projected Medicaid seniors, with demonstration, by year 5 204,300 145,240 67,946 57,297

Projected number of seniors diverted from Medicaid by year 5 5,900 41,442 22,060 13,115

Annual reduction in Medicaid seniors (percentage) 3 5 5 2.5–5

Cumulative 5-year reduction in Medicaid seniors (percentage) 3 22 25 19

Projected dollar savings due to diversion of seniors from Medicaid 

by year 5 $480 million $2 billion $769 million $926 million

Source: GAO analysis. 

Note: Analysis of state and HHS documents and of Jocelyn Guyer, The Financing of Pharmacy Plus 

Waivers: Trade-offs between Expanding Rx Coverage and Global Caps in Medicaid (Washington, 

D.C.: Kaiser Commission on Medicaid and the Uninsured, 2003). 

To project the extent to which Pharmacy Plus would reduce its new 

enrollment of Medicaid seniors, and thus its total senior enrollment, 

Florida made the relatively conservative assumption that the drug benefit 

would enable seniors to avoid Medicaid eligibility for 1 year; after 5 years, 

the state’s total projected number of Medicaid seniors would be 5,900 

(3 percent) lower with the demonstration than without it. The other states, 

in contrast, assumed that everyone diverted in each year of their 

demonstrations would remain out of Medicaid throughout the full 

demonstration period and would not, for example, enter a nursing home, 

which often results in Medicaid eligibility. As a result, Illinois, South 

Carolina, and Wisconsin projected reductions of nearly 20 percent or more 

in Medicaid senior enrollments at the end of 5 years. Had these states 

made more conservative assumptions—assuming, for example, as Florida 

chose to, that providing access to prescription drugs would delay seniors’ 

HHS-Approved Savings 

Assumptions Are Not 

Supported by State 

Experience 
Page 26 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

entry into Medicaid by only 1 year instead of 5—their projected withdemonstration costs would have exceeded projected withoutdemonstration costs and would not have been budget neutral. 

Although states’ demonstration proposals aim to achieve savings by 

expanding seniors’ access to prescription drugs and improving their 

health, in practice it appears that some states’ estimates of expected 

savings may have been derived in part by determining how much in 

savings was needed to demonstrate budget neutrality. In their proposals, 

none of the three states that previously had state-funded pharmacy 

assistance programs (Florida, Illinois, and South Carolina) provided data 

from those programs that specifically supported such high projected 

savings. Based on conversations with Wisconsin health care financing 

officials and a review of documents, we found that the state’s 

demonstration savings estimates were a residual of the budget-negotiating 

process, derived from determining how much was needed in savings to 

demonstrate budget neutrality, rather than from research or data about 

what was realistic. 

The premise that Pharmacy Plus demonstrations will generate savings by 

keeping low-income seniors from becoming Medicaid-eligible is not 

supported by research. In a previous report, we reviewed the research 

studies cited in Illinois’ demonstration proposal and found that they did 

not sufficiently support the state’s theory that a full drug benefit for lowincome seniors would yield the projected level of savings.37 Although these 

studies indicated that access to prescription drugs benefited people in 

poor health, they all focused on people who already had specific 

diagnosed conditions, such as diabetes, heart disease, or HIV, rather than 

on a general population of seniors. An extensive 2003 review of research 

examining drug coverage for low-income seniors found relatively few 

studies about the effect on Medicaid spending of expanded access to a 

 37GAO-02-817. 

Premise behind Approved 

Demonstrations Not Well 

Supported by Research 
Page 27 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

broad prescription drug benefit.38 The one study this review considered 

most relevant, conducted in the mid-1980s, assessed Pennsylvania’s statefunded program, Pharmaceutical Assistance Contract for the Elderly 

(PACE), and found that despite high enrollment, Medicaid entry among 

PACE participants was neither prevented nor delayed enough to have a 

discernible effect on the state’s overall Medicaid budget.39 Other studies of 

broad prescription drug benefits for low-income seniors, including one of 

New York’s program, found some reductions in participants’ health care 

costs but mainly for inpatient hospital care, which, for people age 65 or 

older, is covered by Medicare rather than Medicaid.40 Still other studies in 

this review examined the more limited question of how access to 

appropriate drugs affects people already suffering from specific illnesses. 

Such research sheds little light on the cost-effectiveness of offering 

comprehensive drug benefits to a broad population of low-income seniors. 

Some states that have not submitted Pharmacy Plus proposals examined 

the diversion and savings assumptions behind the demonstrations and 

found that they would not likely be realized. For example, in considering 

whether to apply for a demonstration, Minnesota found a substantial risk 

that seniors receiving only a drug benefit would eventually become 

Medicaid-eligible over a 5-year follow-up period. In its optimal model, the 

study estimated that to generate enough savings to offset the new drug 

costs, the risk of Medicaid entry would have to be reduced by 50 percent 

 38Ellen O’Brien, “Will Prescription Drug Coverage for the Low-income Elderly Pay for 

Itself? A Review of the Literature,” Georgetown University Health Policy Institute working 

paper, prepared for the Kaiser Commission on Medicaid and the Uninsured, May 2003, 

cited with permission. See www.hpi.georgetown.edu/pdfs/obrienrxcostoff.pdf, downloaded 

March 16, 2004. The author identified sources through a Medline search of the research 

literature and a manual search of citations in published papers. The analysis covered 

research literature on the effects of prescription drug coverage on low-income seniors, 

access limits in Medicaid and other insurance plans, studies of specific drugs or drug 

classes, and studies of the cost-effectiveness of recent prescription drugs. 

39Bruce Stuart and Daniel Lago, “Prescription Drug Coverage and Medical Indigence among 

the Elderly,” Journal of Aging and Health, vol. 1, no. 4 (1989), 452–469. 

40In 2002 we reported that in assessing the cost of a Medicare prescription drug benefit at 

that time, CBO, OMB, and CMS’s Actuary did not accept the premise that providing a 

prescription drug benefit to low-income seniors would pay for itself (GAO-02-817). CBO 

raised several reasons for caution, including that greater use of drugs among seniors could 

increase the risk of side effects and adverse drug reactions, which could in turn increase 

use of hospitals, emergency rooms, and other health care services. CBO concluded that 

Medicare beneficiaries without any drug coverage already consumed a large number of 

prescription drugs, and therefore any savings due to increased access would likely be 

small. 
Page 28 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

for non-nursing-home enrollees and by 30 percent for those who become 

eligible after entering a nursing home. Minnesota Medicaid officials 

concluded that this scenario was not realistic and dropped the state’s 

Pharmacy Plus demonstration proposal.41

Pennsylvania also conducted a Pharmacy Plus demonstration feasibility 

study for PACE and the related Pharmaceutical Assistance Contract for 

the Elderly Needs Enhancement Tier (PACENET) programs, which 

together enrolled about 270,000 seniors in 2002.42 The study found that to 

offset drug benefit costs, the programs would need aggressive cost 

containment, through such approaches as increased co-payments, reduced 

provider reimbursements, and a preferred drug list. In addition, the study 

noted that in states with generous drug benefits, savings from expansion 

to more seniors are particularly difficult to realize because most 

beneficiaries who would have avoided expensive nursing home care have 

already done so. As of March 2004, Pennsylvania had not submitted a 

Pharmacy Plus demonstration proposal. 

Although it is early in demonstration implementation, we and others have 

raised concerns about how states may be affected if savings under 

Pharmacy Plus do not accrue and the states’ spending reaches or exceeds 

HHS’s approved spending limits. We noted in our July 2002 report that the 

Illinois Pharmacy Plus demonstration, as approved, makes several risky 

assumptions with regard to the extent of the expected savings.43 In such 

cases the federal government would not be at financial risk, but the states 

would be, because the spending limits cover services for all the states’ 

Medicaid seniors. Any expenditures for Medicaid seniors beyond the 

demonstration’s federally matched spending limit would be entirely the 

state’s responsibility. Officials in Florida and Wisconsin expressed 

concerns that their demonstration spending limits, based on fixed rates of 

growth projected over 5 years, could not be adjusted to reflect 

 41The results of this study by JEN Associates of Cambridge, Massachusetts, were reported 

in a memorandum to the Minnesota Department of Human Services, “Feasibility Analysis of 

PDP Expansion,” dated March 7, 2002. 

42Pennsylvania’s PACE program has operated since 1984 and PACENET has provided an 

expanded benefit to additional low-income seniors since 1996. See Mercer Government 

Human Services Consulting, Pharmacy Plus 1115 Waiver Feasibility Study, 

Commonwealth of Pennsylvania (Phoenix: October 2002). 

43See GAO-02-817, 23–24. 

Concerns about Effects on 

States if Savings Do Not 

Accrue 
Page 29 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

unpredictable changes in costs and enrollment growth. One study has 

raised concerns about the potential effects on Medicaid seniors, noting 

that as state spending approaches the limit of what the federal government 

will match, states may feel pressed to reduce optional expansions of 

eligibility or optional benefits.44 States could also try to control spending 

without reducing eligibility or services by lowering provider 

reimbursements—a step already taken in Illinois, although not in response 

to pharmacy demonstration enrollment or spending—or by implementing 

preferred drug lists.45

As of February 2004, efforts by the states and HHS to evaluate and monitor 

the four approved demonstrations, and to address some of the research 

questions the Pharmacy Plus initiative raises, were in their early stages. 

The four states with approved demonstrations had taken few steps toward 

implementing the evaluation plans required as a condition of approval, and 

an independent evaluation of two of the demonstrations, contracted by 

HHS and started in October 2002, was not scheduled to report until 

September 2005. In the interim, HHS has not ensured that the states’ 

required progress reports contain sufficient information for monitoring 

whether the demonstrations are functioning as intended or that these 

reports are submitted in a timely manner. 

As a condition of Pharmacy Plus approval, HHS requires states to design 

and carry out an evaluation and to report their results after the 

demonstration ends.46 States are required to submit a plan for this 

evaluation in their proposals and in the operational protocols that HHS 

approves before states begin the demonstrations. Although the four states 

with approved Pharmacy Plus demonstrations submitted the required 

evaluation plans—containing research hypotheses, possible outcome 

 44Jocelyn Guyer, The Financing of Pharmacy Plus Waivers: Trade-offs between 

Expanding Rx Coverage and Global Caps in Medicaid (Washington, D.C.: Kaiser 

Commission on Medicaid and the Uninsured, May 2003). 

45According to an Illinois official, the reimbursement rate for all providers, including 

pharmacists, was cut by 6 percent in state fiscal year 2003, and that step helped the 

pharmacy demonstration operate well below its targeted first-year spending limit. 

46States are required to provide HHS with drafts of their final evaluation reports within 

180 days of the end of the 5-year demonstrations; Pharmacy Plus terms and conditions do 

not require interim evaluation reports from the states. HHS also requires the states to 

cooperate with federal evaluators and contractors in the independent evaluation. 

States Have Taken 

Few Steps to Evaluate 

Demonstrations, and 

HHS Has Not Ensured 

Sufficient or Timely 

Progress Reporting 

States Have Taken Few 

Steps to Implement 

Evaluation Plans 
Page 30 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

measures, and data needs—as of February 2004, they had taken few steps 

to put their evaluation plans into practice. 

As HHS requires, the four states’ initial proposals and operational 

protocols included plans for how they would evaluate whether their 

demonstrations were working as intended. With some variations, all the 

plans proposed to address the overall research question of how providing 

a pharmacy benefit to non-Medicaid-covered seniors would affect 

Medicaid costs, service use, and future eligibility trends, including whether 

savings achieved by diverting individuals from Medicaid eligibility would 

offset the benefit’s cost. The first demonstration proposal, from Illinois, 

initially contained an extensive plan to assess demonstration outcomes; 

the plan later changed significantly. The initial plan proposed that the state 

collect data from sources such as Medicaid and Medicare claims systems, 

surveys of participants or case-study interviews, and demonstrationspecific claims. In terms of outcome measures, Illinois’ plan proposed 

comparing seniors who do have the drug benefit with seniors who do not 

on such measures as hospitalization rates, health care service costs, use of 

emergency room services, and rates and length of nursing home stays. A 

later version of Illinois’ plan (as described in the state’s operational 

protocol), however, calls for using existing Medicaid claims data for only 

one outcome measure, Medicaid spending for seniors. 

Both South Carolina and Wisconsin adopted Illinois’ relatively extensive 

initial evaluation plan in their demonstration proposals, and as of February 

2004, neither South Carolina nor Wisconsin had changed its proposed 

plan. Florida, which did not submit an evaluation plan in its demonstration 

proposal, provided a two-paragraph discussion in its operational protocol. 

This discussion listed several hypotheses and indicators to be monitored, 

noted that data would be collected using the state’s current Medicaid 

system, and gave no details about how or when the plan would be 

implemented. 

As of February 2004, the states had taken few steps to implement their 

demonstration evaluation plans or to determine how they would collect or 

analyze data to support their evaluations. States’ evaluation activities were 

generally limited to collecting and reporting to HHS data from their 

existing Medicaid data systems. Although plans for Illinois, South 

Carolina, and Wisconsin call for starting their evaluations at the start of 

their demonstrations to draw on data about services used before and 
Page 31 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

throughout beneficiaries’ enrollment, these states and Florida indicated 

they were just beginning to collect and report data to implement their 

evaluation plans: 

• Florida and South Carolina officials told us that they had not decided 

whether their evaluations would be designed and conducted by the state 

Medicaid agency or by an outside entity such as a university. Neither state 

had developed an evaluation implementation schedule. 

• Illinois and Wisconsin reported providing extensive state data for HHS’s 

independent evaluation of their demonstrations but, at the time of our 

review, had not begun their own evaluations. State officials told us they 

understood that participating in the independent evaluation would exempt 

them from conducting their own evaluations. But HHS officials told us that 

state evaluations were still required. 

HHS has contracted with independent university researchers for an 

extensive evaluation of the Pharmacy Plus demonstrations in Illinois and 

Wisconsin. The evaluation’s goal is to document achievements and 

difficulties in implementing a Pharmacy Plus demonstration, as well as to 

identify impacts on entry into Medicaid and on costs to Medicare. 

According to HHS, the evaluation aims to address whether providing 

prescription drug benefits to non-Medicaid seniors will keep individuals 

relatively healthy, divert them from full Medicaid eligibility, and thus lower 

Medicaid and Medicare costs. To address these issues, the evaluation 

contract calls for four components of work, including (1) site visits to 

Illinois and Wisconsin to describe the demonstrations and their 

implementation; (2) telephone surveys of demonstration beneficiaries in 

those states about their health status, access to health care, and prior drug 

coverage; (3) analysis of Medicaid, Medicare, and demonstration claims 

data to assess patterns of drug use and effects on Medicaid and Medicare 

costs; and (4) an analysis of enrollment trends in each state’s Medicaid 

program to determine if diversion assumptions are met. In addition, the 

evaluation aims to compare the experiences of demonstration 

beneficiaries with a similar population in another state that does not offer 

a prescription drug benefit.47

 47The evaluators chose Ohio because of its proximity to both Illinois and Wisconsin; the 

characteristics of its senior population; and likely similarities in the attitudes of that state’s 

policymakers, physicians, and public about the use of long-term care services. 

HHS Has Contracted for an 

Independent Pharmacy 

Plus Evaluation 
Page 32 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

Final results for all components of this planned 3-year evaluation, which 

began in October 2002, are scheduled to be reported to HHS by September 

2005.48 Specifically, a final report to HHS on the patterns of drug use is due 

in September 2004; final reports on the demonstrations’ cost effects on 

Medicaid and Medicare are due in September 2005. The evaluation 

contract does not indicate when results from the work may be available to 

other researchers or the public. 

According to the HHS evaluation project officer, the independent 

evaluators completed state site visits to Illinois and Wisconsin in July 2003 

for the descriptive work component and submitted draft reports to HHS in 

December.49 These reports were in review as of March 2004, and the 

project officer expected them to be approved and posted on HHS’s Web 

site, although he did not know when posting would occur. A report 

containing results from the second evaluation component, the telephone 

surveys of beneficiaries, was expected later in 2004.50

HHS’s monitoring and reporting requirements, which the states agree to 

carry out under HHS oversight, are set forth in the terms and conditions 

attached to each demonstration’s approval letter. Although HHS and the 

states participated in required telephone conference calls to monitor the 

demonstrations’ start-up, HHS has not ensured that all states submit the 

required quarterly and annual progress reports. The lack of sufficient and 

timely information from progress reports may impair the department’s 

ability to monitor demonstration operations and accomplishments. 

 48HHS selected Illinois and Wisconsin, the first two demonstrations to be implemented (in 

June and July 2002), for the independent evaluation. In March 2004, HHS’s evaluation 

project officer indicated that the new Medicare prescription drug program and its potential 

effects on Pharmacy Plus demonstrations may lead the department to reassess plans and 

schedules for the independent evaluation. 

49The descriptions include such information as how each demonstration was established, 

demonstration features, each state’s economic and political environment, obstacles 

encountered during program implementation, and the state’s progress toward 

implementation and ensuring beneficiary access to prescription drugs. 

50The evaluators have also developed a database, including data provided from Illinois’ and 

Wisconsin’s Medicaid data systems, allowing them to track and analyze demonstration 

enrollment, costs, drug use, and demographics, along with HHS Medicare claims data for 

Pharmacy Plus beneficiaries from 1 year before enrollment in the demonstration through 

their first year. 

HHS Has Not Ensured 

That States Meet ProgressReporting Requirements 
Page 33 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

Monitoring and reporting requirements are not as clearly established for 

the Pharmacy Plus initiative as for the Health Insurance Flexibility and 

Accountability (HIFA) initiative: 

• The HIFA and Pharmacy Plus initiatives both require states to participate 

with HHS in monthly telephone monitoring calls. For pharmacy 

demonstrations, however, monthly calls are required for 6 months after 

implementation and only as needed thereafter; for most approved HIFA 

demonstrations, monthly calls are unlimited. 

• States with approved HIFA demonstrations are required to submit 

quarterly progress reports in a format agreed upon with HHS, and 

demonstration terms and conditions describe the required content of these 

reports. The terms and conditions for Pharmacy Plus demonstrations are 

less specific regarding progress report format and content. 

• HIFA demonstrations are expected to submit separate annual reports that 

discuss progress in evaluating the demonstrations, including results of 

data collection and analysis to test research hypotheses. Pharmacy Plus 

annual reports, in contrast, may be combined with or include the fourth 

quarterly progress report, may follow the same broad content guidelines 

as quarterly reports, and are not required to report progress in evaluation. 

As of March 2004, HHS and the four Pharmacy Plus states had participated 

in the initial monitoring phone calls and begun to gather data on how their 

demonstrations were working. HHS and the states confirmed participating 

in monthly telephone calls for the first 6 months and then agreeing to 

maintain contact as needed. An HHS official told us the department did 

not set agendas or document these informal contacts, which focused on 

demonstration operations as states tracked enrollment and began to 

gather information about drug use and expenditures for new beneficiaries. 

States reported taking some steps to develop the capacity to report on 

their demonstrations. Florida, Illinois, and Wisconsin, for example, 

reported having or developing data management systems containing state 

Medicaid and other data that are capable of generating demonstrationspecific reports. South Carolina expected to rely on existing Medicaid data 

systems. None of the states, however, were tracking the number of 

demonstration enrollees who had become eligible for Medicaid, although 

officials in three states reported the ability to do so. Further, the states had 

not provided information to HHS to assess whether diversion savings were 

occurring. 
Page 34 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

The information that HHS requires states to report has been insufficient 

for determining whether the demonstrations are operating as intended. 

According to one HHS official, HHS has not prescribed a standard format 

for, or specific information to be provided in, either the quarterly or 

annual progress reports; rather, the department works with the states to 

obtain needed information. The Pharmacy Plus terms and conditions 

stipulate that written quarterly and annual progress reports contain, at 

minimum, (1) a discussion of events during the quarter, including 

“enrollment numbers, lessons learned, and a summary of expenditures”;51

(2) notable accomplishments; and (3) problems and questions that arose 

and how they were resolved. The same HHS official told us that in 

response to these general requirements, states’ progress reports did not 

always include all information considered useful for monitoring purposes. 

For example, HHS reported that officials were working with Illinois to 

obtain additional information to complete its draft annual progress report. 

Illinois’ six-page annual report, submitted in September 2003, reported 

only on new demonstration beneficiaries and did not include first-year 

starting or ending enrollment or cost information for the state’s Medicaid 

senior program as a whole—the services and population affected by the 

Pharmacy Plus spending limit. One HHS official told us that after review of 

Illinois’ report, these cost and enrollment data were specifically requested 

to assess whether the new drug benefit was keeping seniors from 

becoming eligible for full Medicaid benefits. As of February 2004, Illinois 

had not provided this information. 

Finally, HHS has not insisted on timely submission of the required 

quarterly and annual reports. Although Pharmacy Plus terms and 

conditions specify that quarterly reports are due 60 days after the end of 

the quarter, and annual reports are due 60 days after the end of the fourth 

quarter, HHS has not ensured that states submit the reports on time. 

Again, the department’s policy is to work with the states toward 

compliance. As of January 2004, Florida and Wisconsin had submitted all 

required written quarterly reports, mostly on time, while South Carolina 

had submitted only one of three required progress reports.52 Illinois, whose 

 51Centers for Medicare & Medicaid Services, Pharmacy Plus: A Demonstration Program 

under Section 1115: Model Special Terms and Conditions of Approval (Washington, D.C.: 

U.S. Department of Health and Human Services, n.d.), 4, 

www.cms.hhs.gov/medicaid/1115/pharmplustemptc.pdf (downloaded Apr. 6, 2004). 

52According to an HHS official, quarterly reports for South Carolina’s demonstration were 

delayed because the state had difficulty generating data on demonstration expenses, 

requiring department officials to work with the state on the problem. 
Page 35 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

demonstration was the first to be implemented, did not submit any of the 

three required quarterly reports before submitting its combined fourth 

quarterly and first annual report early in September 2003. 

HHS’s approval and monitoring of state demonstrations under the 

Pharmacy Plus initiative raise cost and oversight concerns and, ultimately, 

program concerns. The department’s approval of four states’ 

demonstrations raises questions about HHS’s basis for its decisions. 

Because HHS based the spending limits it approved on higher-thanjustified growth rates, these spending limits do not, in our view, represent 

reasonable estimates of demonstration costs over the 5-year trial periods 

and are not budget neutral. It was difficult to assess the reasonableness of 

the spending limits themselves, given that they were decided upon through 

an undocumented negotiation process, and neither public nor HHS 

internal documents stated the rationale for approving higher growth rates. 

We found that if HHS’s benchmarks had been used to establish the 

spending limits, the federal government’s liability for the four 

demonstrations could have been $1.6 billion lower over 5 years. Moreover, 

the approved demonstrations rely on highly questionable assumptions 

about the extent to which savings would accrue to Medicaid from 

improved health of people receiving the new pharmacy benefit, 

particularly since many of them already had pharmacy benefits through 

existing state-funded programs. 

In addition, the Pharmacy Plus initiative raises important evaluation 

questions about how improved access to prescription drugs may affect 

seniors’ health and Medicaid and Medicare costs. Although some of these 

questions will likely be addressed by the independent evaluation of two 

states’ demonstrations, in the interim HHS does not appear to be ensuring 

that states provide sufficient, consistent, and timely information for 

demonstration monitoring or that states begin implementing their own 

evaluation plans. The limited available information on how these 

demonstrations are operating makes it difficult to assess whether they are 

operating as intended. 

The concerns about HHS’s approved Pharmacy Plus demonstrations 

parallel those we have raised about other section 1115 waiver 

demonstration approvals over the past decade. These include the extent to 

which the department is protecting the Medicaid program’s fiscal integrity 

and the need for clear criteria and a public process when HHS reviews and 

approves demonstrations. Along with the authority to waive Medicaid 

requirements, and the flexibility given states to test new approaches for 

Conclusions 
Page 36 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

delivering services more efficiently and effectively, comes the 

responsibility for making decisions based on clear criteria and for 

monitoring the demonstrations and learning from them. More can and 

should be done to fulfill this responsibility. 

In light of our findings that the four HHS-approved Pharmacy Plus 

demonstrations are likely to substantially increase federal Medicaid 

spending, as previously approved Medicaid section 1115 demonstrations 

have done; that HHS’s review process and basis for these approvals have 

not been clearly set forth; and that approved demonstrations are not all 

meeting evaluation and monitoring requirements, we are making seven 

recommendations to the Secretary of HHS related to the section 1115 

demonstration process. 

To improve HHS’s process for reviewing and approving states’ budget 

neutrality proposals for Pharmacy Plus and other Medicaid section 1115 

demonstrations, we recommend that the Secretary take three actions: 

• For future demonstrations, clarify criteria for reviewing and approving 

states’ proposed spending limits. 

• Consider applying these criteria to the four approved Pharmacy Plus 

demonstrations and reconsider the approval decisions, as appropriate. 

• Document and make public the basis for any section 1115 demonstration 

approvals, including the basis for the cost and enrollment growth rates 

used to arrive at the spending limits. 

To ensure that approved Pharmacy Plus and other Medicaid section 1115 

demonstrations fulfill the objectives stated in their evaluation plans, we 

recommend that the Secretary take two actions: 

• Ensure that states are taking appropriate steps to develop evaluation 

designs and to implement them by collecting and reporting the specific 

information needed for a full evaluation of the demonstration objectives. 

• On acceptance, make public the interim and final results of HHS’s 

independent Pharmacy Plus evaluation. 

To ensure that the Secretary and other stakeholders have the information 

needed to monitor approved Pharmacy Plus and other Medicaid section 

1115 demonstrations to determine if they are functioning as intended, we 

recommend that the Secretary take two actions: 

Recommendations for 

Executive Action 
Page 37 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

• Ensure that states provide sufficient information in their demonstration 

progress reports, in a consistent format, to facilitate the department’s 

monitoring. 

• Ensure that states submit required demonstration progress reports in a 

timely manner. 

We provided a draft of this report for comment to HHS and the states of 

Florida, Illinois, South Carolina, and Wisconsin. HHS and Florida, Illinois, 

and Wisconsin responded with written comments, which are reproduced 

in appendixes III through VI, respectively. South Carolina provided 

technical comments, which we incorporated in our report as appropriate. 

HHS concurred with five of our recommendations to strengthen the 

processes for approving and overseeing Pharmacy Plus and other 

Medicaid section 1115 waivers and disagreed with two. It concurred with 

our recommendations to make public the basis for section 1115 

demonstration approvals and to ensure that Pharmacy Plus and other 

Medicaid section 1115 demonstrations fulfill the objectives of their 

evaluation plans by working with the states toward useful program 

evaluations and making results of the independent Pharmacy Plus 

evaluation publicly available. HHS also concurred with our 

recommendation to ensure that adequate information is available to 

monitor the demonstrations to determine if they are functioning as 

intended. In this regard, HHS stated that it has provided each state that has 

implemented a Pharmacy Plus demonstration with an example of an 

outline and content to be used as a guide for progress reports and that it 

will make concerted efforts to ensure that states submit the reports in a 

timely manner. 

HHS did not concur with our recommendation that the Secretary of HHS 

clarify criteria for reviewing and approving states’ proposed 

demonstration spending limits, indicating that although the department 

recognizes the importance of using criteria for reviewing budget 

neutrality, strict criteria cannot be determined in advance because states’ 

circumstances differ. HHS also strongly disagreed with our 

recommendation that the Secretary consider applying clarified criteria to 

the four approved Pharmacy Plus demonstrations and reconsider the 

approval decisions as appropriate. HHS stated that it used criteria to 

review each of the approved, disapproved, and pending demonstration 

proposals; believes the four approved demonstrations were based on wellsupported budget estimates of future state spending; and does not believe 

Agency and State 

Comments and Our 

Evaluation 

HHS’s Comments and Our 

Evaluation 
Page 38 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

it appropriate to reconsider approved demonstrations before the end of 

the approval periods. 

We agree with HHS that some flexibility is appropriate in considering the 

unique Medicaid section 1115 demonstrations proposed by different states. 

Consistent with our analyses of other section 1115 demonstration waivers 

over the past decade, however, we believe HHS’s review process and 

decision criteria should be clear, and the results—particularly when 

approved spending limits deviate significantly from limits developed using 

benchmarks that HHS said it uses as a starting point—should be publicly 

explained and documented in the demonstrations’ approval letters and 

terms and conditions. Even though HHS has developed a standard 

application form for Pharmacy Plus demonstrations, that form and other 

guidance does not provide written criteria for how HHS reviews and 

approves the growth rates that states propose. HHS’s rationale for 

significantly deviating from benchmarks for projecting future program 

growth in establishing different states’ spending limits has not been 

documented or made clear to us or to others, including other states that 

may be seeking approval of demonstration proposals. Without such clarity, 

questions arise as to how consistently states have been or will be treated 

in applying for demonstrations. Further, in our view, Pharmacy Plus 

demonstration approvals were based on questionable savings 

assumptions. We believe that HHS should establish clear criteria on which 

to base the spending limits and should reconsider its spending limit 

decisions for the approved Pharmacy Plus demonstrations in light of such 

criteria. 

HHS also commented that it was premature to evaluate the Pharmacy Plus 

demonstrations given the limited experience from 12 to 18 months of 

operation. HHS said that were the outcome predetermined, a 

demonstration would serve no purpose. The agency believes the Pharmacy 

Plus initiative provides states an opportunity to use a Medicaid 

demonstration to test if providing drug coverage will prevent the aged and 

disabled low-income population from becoming Medicaid eligible. HHS 

noted that the four approved demonstrations together are providing drug 

coverage to 346,000 seniors who would otherwise be without this 

important benefit. 

We agree that it is too early to evaluate the outcomes of the 5-year 

demonstrations and that section 1115 demonstrations are intended to test 

new propositions. More needs to be done, however, to ensure that states’ 

evaluations collect the information needed to determine whether those 

new propositions are functioning as intended. Four states have Pharmacy 
Page 39 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

Plus demonstrations in place to test such propositions, and substantial 

federal funding is involved, including costs that were previously paid for 

by the states themselves. For these reasons, HHS has a responsibility to 

(1) make fiscally prudent decisions in its approvals, (2) ensure that savings 

hypotheses have some grounding in experience or research, and 

(3) ensure that the evaluations are planned and conducted in a way that 

will produce adequate information regarding the demonstrations’ research 

hypotheses. 

We also agree that the demonstrations can provide a valuable benefit to 

low-income seniors and disabled individuals who might otherwise be 

without drug coverage. But three of the four states with approved 

demonstrations had state-funded drug coverage programs in place before 

implementing their Pharmacy Plus demonstrations, and these state-funded 

programs became eligible for federal matching funds when the 

demonstrations were approved. We therefore find HHS’s statement that 

the demonstrations are providing drug coverage to seniors who would 

otherwise be without it to be an overstatement. 

HHS also commented on how MMA may affect the operation of approved 

Pharmacy Plus demonstrations and the review of pending and new 

demonstration proposals. HHS stated that seniors covered by the four 

Pharmacy Plus demonstrations will be able to begin receiving drug 

coverage under the Medicare Part D program in January 2006, and states 

will be able to use their own funds to “wrap around” the Medicare benefit 

to assist other Medicare beneficiaries whose incomes exceed the level for 

low-income subsidies. At that time, HHS believes there will be less need 

for Pharmacy Plus demonstrations, given expanded Medicare coverage for 

prescription drugs, and states operating the demonstrations will need to 

decide if they want to continue doing so and if their demonstrations can 

continue to be budget neutral. We have reviewed and incorporated this 

new information as appropriate. 

HHS’s written comments appear in appendix III, along with our response 

to additional comments that HHS provided on the findings in our draft 

report. The department also provided technical comments, which we 

considered and incorporated as appropriate. 

Illinois and Wisconsin officials commented that our draft report overstated 

the demonstrations’ financial risk to the federal government and was 

unnecessarily alarming in light of data showing that the demonstrations 

are operating well within their spending limits. In its comments, Illinois 

Illinois’ and Wisconsin’s 

Comments and Our 

Evaluation 
Page 40 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

said that it stood by the growth rates it used to develop the spending limit 

for its Pharmacy Plus demonstration; it further argued for the soundness 

of its demonstration’s premise—that providing a drug benefit to seniors 

will keep them healthier than if they had no drug coverage. In its 

comments, Wisconsin said that the draft report failed to consider the 

significant benefits its demonstration offers to the federal government and 

to seniors. 

We agree that providing a drug benefit to seniors could keep them 

healthier, and we do not dispute the benefit to seniors of the states’ drug 

programs started or expanded through Pharmacy Plus demonstrations. 

The demonstrations were approved, however, on the presumption that the 

cost of each state’s prescription drug program would be paid for in savings 

from keeping seniors with little or no previous drug coverage healthy 

enough that they would not become eligible for full Medicaid benefits. 

Illinois’ demonstration was approved on this presumption even though 

most of the beneficiaries were already receiving some prescription drug 

coverage through the state’s existing state-funded program. We remain 

concerned that HHS is not maintaining its policy to ensure demonstrations 

are budget neutral. 

Illinois also commented that it had taken all necessary steps to conduct its 

own evaluation and that it had cooperated fully with federal evaluators 

and HHS officials. Illinois said that although it officially filed its quarterly 

reports late, it submitted all the detailed data contained in those reports to 

CMS monthly. We are principally concerned with the extent to which the 

information that Illinois provided could be used to monitor whether the 

demonstration was operating as intended. Its one- to two-page quarterly 

reports, filed late, tallied the number of beneficiaries enrolled in the 

demonstration and drug expenditures to date and provided a narrative 

paragraph on accomplishments, problems, or issues. The information 

itself, however, furnishes little insight as to whether the demonstration is 

operating as intended or whether the benefit is reducing Medicaid costs. 

Wisconsin commented that the draft report failed to ascribe any value to 

the government of Wisconsin’s agreement to cap its federal Medicaid 

funding for seniors as a condition of Pharmacy Plus demonstration 

approval. We believe the draft report accurately captured HHS’s approach 

to limiting the federal liability for the Pharmacy Plus demonstrations by 

establishing a “cap,” or spending limit, as a condition of approval. We 

remain neutral on the “value” of this cap for several reasons. Requiring 

states to abide by a spending limit is a departure from the open-ended 

entitlement nature of the Medicaid program. We also recognize that under 
Page 41 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

the Medicaid program, states have considerable discretion to alter 

spending by increasing—or decreasing—coverage for certain populations 

and services. In addition, we recognize that HHS’s budget neutrality 

practices provide for flexibility in approach and that HHS has established 

such a limit on other section 1115 demonstrations before the Pharmacy 

Plus initiative. 

Wisconsin also commented that the draft report failed to mention that the 

demonstrations were reviewed, determined reasonable, and approved by 

OMB. We recognize that OMB is involved in assessing budget neutrality 

and other aspects of Pharmacy Plus and mentioned that agency’s role in 

our draft report. Nevertheless, as OMB officials told us, the authority for 

section 1115 waiver approval rests with the Secretary of HHS, and 

responsibility for final Pharmacy Plus approval decisions rests with the 

Secretary and his designees. 

Wisconsin further commented that in criticizing CMS for not obtaining 

better evidence to support projected savings, our report fails to consider 

that the reason for demonstration projects is precisely to test such 

propositions. We maintain, however, that when HHS establishes a new 

initiative to encourage states to apply for Pharmacy Plus demonstrations, 

it is the agency’s responsibility to ensure that each demonstration’s 

evaluation objectives are reasonable, each demonstration’s savings 

assumptions are realistic and grounded in some evidence, and the 

evaluations are well planned and data monitoring is established early 

enough to assure that the questions can be answered. 

Florida commented that its demonstration was predicated upon savings to 

be achieved over the 5-year life of the program and that its proposed 

spending limit was close to—less than 1 percent above—the conservative 

benchmark spending level we calculated. We agree that Florida’s spending 

limit was relatively close to a limit based on the benchmarks and included 

that information in the draft report. 

South Carolina provided technical comments that we incorporated as 

appropriate. 

Other States’ Comments 

and Our Evaluation 
Page 42 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

As arranged with your offices, unless you release its contents earlier, we 

plan no further distribution of this report until 30 days after its date. At 

that time, we will send copies of this report to the Secretary of Health and 

Human Services, the Administrator of the Centers for Medicare & 

Medicaid Services, and others who are interested. We will also make 

copies available to others upon request. In addition, the report will be 

available at no charge on the GAO Web site at http://www.gao.gov. 

If you or your staff have any questions, please contact me at (202) 512-

7118. Another contact and other major contributors are listed in 

appendix VII. 

Kathryn G. Allen 

Director, Health Care—Medicaid 

 and Private Health Insurance Issues 
Appendix I: Calculating a State’s Pharmacy 

Plus Spending Limit for All Medicaid Seniors 

Page 43 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

To achieve budget neutrality, a state’s projected 5-year spending with its 

Pharmacy Plus demonstration cannot exceed 5-year projected costs 

without the demonstration. As a result, the projected costs of a state’s 

existing Medicaid program for seniors effectively sets the spending limit 

while the demonstration is under way. Calculating this withoutdemonstration limit (steps 1–5 in fig. 1) starts with a base year, generally 

the most recent full year for which data are available; calculations for each 

subsequent year are based on numbers from the previous year. The result 

limits a state’s Medicaid spending for all services provided to all Medicaid 

seniors in the state. 

Appendix I: Calculating a State’s Pharmacy 

Plus Spending Limit for All Medicaid Seniors 
Appendix I: Calculating a State’s Pharmacy 

Plus Spending Limit for All Medicaid Seniors 

Page 44 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

Figure 1: Steps to Calculate Projected 5-Year Without-Demonstration Costs 

Step 1

Estimate Medicaid costs per senior for each year

Cost per senior Cost 

growth rate

Projected 1-year

cost per senior 

Estimate Medicaid senior enrollment for each year

Enrollment Enrollment

growth rate 

Projected

1-year

enrollment

Step 3

Step 5

Set Pharmacy Plus spending limit for all Medicaid seniors

Step 4

Determine costs for each of 4 more years

Step 2

Source: GAO.

Determine 1-year costs for Medicaid seniors

Projected 1-year 

cost per senior

Projected 

1-year 

enrollment

Projected 

1-year costs

Repeat steps 1–3 four times. Each time, cost per senior and 

enrollment figures come from preceding year’s projection. 

Cost and enrollment growth rates remain constant.

Add up projected 

costs for all 5 years

5-year Pharmacy Plus 

spending limit
Appendix I: Calculating a State’s Pharmacy 

Plus Spending Limit for All Medicaid Seniors 

Page 45 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

Calculating projected 5-year with-demonstration costs follows the same 

steps but, in addition, factors in the estimated number of new beneficiaries 

receiving only the prescription drug benefit; the costs of providing them 

the benefit; and the expected savings, mainly from keeping these 

beneficiaries healthy enough to avoid eligibility for full Medicaid. 
Appendix II: Denied, Withdrawn, and Pending 

Pharmacy Plus Demonstration Proposals as of 

May 2004 

Page 46 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

State and status Description 

Denied 

Hawaii

Submitted January 2003 

Denied April 2003 

Projected enrollment: Individuals with incomes at or below 300 percent of the federal 

poverty level (FPL). 

Coverage and cost sharing: Sought federal assistance only for administrative costs for 

a demonstration to make prescription drugs available at the discounted Medicaid rate 

plus a dispensing fee. State was to contribute $1 toward the cost of each prescription in 

the first year, increasing to $8 by the fifth year. 

Reasons for denial: Exceeded the Pharmacy Plus income limit at or below 200 percent 

of FPL, provided for only minimal state financial contributions to pharmacists, and did not 

include the necessary budget neutrality analysis. 

Delaware

Submitted December 2002 

Denied July 2003 

Projected enrollment: Seniors and adults with disabilities with incomes at or below 

200 percent of FPL or, if income is above 200 percent of FPL, with prescription drug 

expenses exceeding 40 percent of their incomes. 

Coverage and cost sharing: All prescriptions covered by the Medicaid state plan, up to 

an annual benefit limit of $2,500. Participants to pay co-payments of $5 or 25 percent of 

the cost per prescription, whichever is greater. 

Reason for denial: State already provided drug benefits to the people to be covered 

under the demonstration. 

Withdrawn 

Massachusettsa 

Submitted July 2002 

Withdrawn March 2003 

Projected enrollment: Seniors with incomes at or below 188 percent of FPL. 

Coverage and cost sharing: Same broad prescription drug coverage as state Medicaid 

plan. State proposed three levels of co-payments (exact amounts not specified): generic 

drugs, designated brand-name drugs, and all other brand-name drugs. Full cost of 

prescriptions to be covered after participants reached annual out-of-pocket spending 

limits: for example, a single person would pay the lesser of $2,000 or 10 percent of gross 

annual income. 

Reason for withdrawal: State’s existing pharmacy assistance program for seniors 

already covered the populations to be included in the demonstration, and without an 

expansion the state and the Department of Health and Human Services (HHS) could not 

reach agreement on budget neutrality. 

Pending 

Connecticut 

Submitted December 2001 

Projected enrollment: Seniors and adults with disabilities with incomes up to 300 

percent of FPL. 

Coverage and cost sharing: All prescription drugs and insulin and syringes with 

specified exceptions, such as cosmetics and antihistamines. Annual registration fee of 

$25 and co-payments of $12 for those with incomes up to approximately 233 percent of 

FPL and $20 for those above. 

State program: Covers low-income seniors and people with disabilities with incomes up 

to approximately 233 percent of FPL. Demonstration would expand eligibility up to 300 

percent of FPL. 

Appendix II: Denied, Withdrawn, and Pending 

Pharmacy Plus Demonstration Proposals as 

of May 2004 
Appendix II: Denied, Withdrawn, and Pending 

Pharmacy Plus Demonstration Proposals as of 

May 2004 

Page 47 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

State and status Description 

New Jersey 

Submitted March 2002 

Projected enrollment: Seniors and adults with disabilities with incomes at or below 

200 percent of FPL. 

Coverage and cost sharing: All prescription drugs covered by state Medicaid plan, with 

$5 co-payment for each prescription. For brand-name drug when generic is available, $5 

co-payment plus cost difference between the two. 

State program: Covers seniors and adults with disabilities with incomes up to 222 

percent of FPL if single and 202 percent if married. Demonstration would cover 

individuals with incomes at or below 200 percent of FPL. 

Arkansas 

Submitted September 2002 

Projected enrollment: Qualified Medicare beneficiaries age 65 or older with incomes at 

or below 85 percent of FPL. 

Coverage and cost sharing: Would cover two prescriptions per beneficiary per month. 

Annual $25 enrollment fee and co-payments of $10 for each generic prescription and 

$20 for each brand-name drug. 

State program: No state-funded pharmacy assistance program for seniors at the time of 

demonstration proposal submission. 

Indiana 

Submitted June 2002 

Revised proposal submitted May 2003 

Projected enrollment: Seniors with incomes at or below 135 percent of FPL. 

Coverage and cost sharing: Same prescription drugs as the state’s Medicaid program, 

plus insulin, up to annual benefit caps set on a sliding scale: $1,000 for people with 

incomes up to 100 percent of FPL; $750 for those with incomes up to 120 percent of 

FPL; and $500 for those with incomes at or below 135 percent of FPL. Participants 

would pay 50 percent of the discounted program price, which is the same as the 

Medicaid price, for each prescription. 

State program: Existing state-funded pharmacy program for low-income seniors to be 

covered under the demonstration with no change in eligibility or drug coverage. State 

indicated that increased enrollment was expected in the demonstration following a 

change from a mail-in rebate system to a point-of-sale system using a discount card. 

Maine 

Submitted August 2002 

Projected enrollment: Seniors age 62 or older and adults with disabilities with incomes 

at or below 185 percent of FPL. 

Coverage and cost sharing: Prescription drugs for specified conditions with 20 percent 

co-payment for each prescription, or 10 percent if from mail-order sources. Broader 

range of drugs available for coverage with 20 percent co-payment after $1,000 out-ofpocket expenses. 

State program: Demonstration would cover state-funded pharmacy program, expand 

conditions covered, and add voluntary mail-order purchase. 

Rhode Island 

Submitted October 2002 

Projected enrollment: Seniors and adults with disabilities or chronic illness, including 

chronic mental illness, with incomes at or below 200 percent of FPL. 

Coverage and cost sharing: All prescription drugs covered by state Medicaid plan. 

Annual $25 enrollment fee (waived for first year of program) and co-payments that 

increase after participants have incurred $1,800 of drug expenses per year under the 

program, from $2 to $4 for generics and from $8 to $12 for brand-name drugs with no 

generic equivalent; other brand-name drugs have a $25 co-payment. 

State program: The demonstration would cover individuals with incomes at or below 

200 percent of FPL from three state-funded pharmacy programs, while individuals in 

those programs with higher incomes would continue to be state funded. The scope of 

drugs covered by state programs would be expanded under the demonstration. 
Appendix II: Denied, Withdrawn, and Pending 

Pharmacy Plus Demonstration Proposals as of 

May 2004 

Page 48 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

State and status Description 

North Carolina 

Submitted January 2003 

Projected enrollment: Seniors with incomes at or below 200 percent of FPL. 

Coverage and cost sharing: All prescription drugs and insulin. Co-payments of $5 for 

generic and $15 for brand-name drugs; annual benefit limit of $1,000 per participant. 

State program: Demonstration would cover and expand existing state-funded program 

by broadening prescription drugs covered from drugs for three specific conditions to 

those for all conditions, reducing cost sharing, and increasing annual benefit limit from 

$600 to $1,000. 

Michigan 

Submitted February 2003 

Projected enrollment: Seniors with incomes at or below 200 percent of FPL. 

Coverage and cost sharing: Most prescription drugs covered by state Medicaid plan, 

plus insulin and syringes. Annual $25 enrollment fee and coinsurance of 20 percent of 

cost of each prescription up to a monthly cap on a sliding scale determined by household 

income. An additional co-payment would be charged for brand-name drugs with generic 

equivalents. 

State program: Demonstration would cover existing state-funded pharmacy assistance 

program with the same eligibility and coverage and expand enrollment. 

Source: GAO analysis of state and HHS documents. 

Notes: These descriptions of states’ Pharmacy Plus demonstration proposals are based on the 

proposals as submitted for HHS review. Changes to proposals that may be made during the review 

process and before approval are not available in documents. 

a

In March 2003, Massachusetts withdrew two separate section 1115 demonstration proposals from 

review: a Pharmacy Plus demonstration for seniors (the proposal described in this appendix) and a 

prescription drug benefit for individuals with disabilities as an amendment to the state’s section 1115 

Medicaid managed care demonstration. At the same time, Massachusetts submitted a new 

proposal—not a Pharmacy Plus proposal—to add a drug benefit for certain seniors and disabled 

individuals as an amendment to its existing managed care demonstration. In August 2003, that 

proposal was also withdrawn. 
Appendix III: Comments from the Department 

of Health and Human Services 

Page 49 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

Appendix III: Comments from the 

Department of Health and Human Services 
Appendix III: Comments from the Department 

of Health and Human Services 

Page 50 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 
Appendix III: Comments from the Department 

of Health and Human Services 

Page 51 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 
Appendix III: Comments from the Department 

of Health and Human Services 

Page 52 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 
Appendix III: Comments from the Department 

of Health and Human Services 

Page 53 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 
Appendix III: Comments from the Department 

of Health and Human Services 

Page 54 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 
Appendix III: Comments from the Department 

of Health and Human Services 

Page 55 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 
Appendix III: Comments from the Department 

of Health and Human Services 

Page 56 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

Now pages 19 and 20. 
Appendix III: Comments from the Department 

of Health and Human Services 

Page 57 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 
Appendix III: Comments from the Department 

of Health and Human Services 

Page 58 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 
Appendix III: Comments from the Department 

of Health and Human Services 

Page 59 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

In addition to indicating whether it concurred with our seven 

recommendations, HHS commented on the report draft’s findings in three 

areas. 

HHS disagreed with our conclusion that the four approved Pharmacy Plus 

demonstrations will not prove to be budget neutral to the Medicaid 

program and will possibly result in increased federal Medicaid spending. 

HHS stated that the department takes seriously its responsibility to ensure 

budget neutrality in the Medicaid demonstrations it approves, noting that 

it approved four Pharmacy Plus demonstrations while denying two and 

reviewing but not approving nine other proposals whose budget estimates 

were not well supported. 

HHS was concerned that we missed the fundamental purpose of budget 

neutrality, which HHS says is not to hold states to a formula-driven cap but 

to estimate the amount of future Medicaid spending. HHS believes that the 

four approved demonstrations’ spending limits were based on wellsupported budget estimates of future state spending,1 and said its policy 

has never been to hold states to benchmark levels of growth. Those 

benchmarks are, in HHS’s view, a starting point in projecting how the 

program will grow, because HHS typically permits states to present 

rationales for higher growth rates. 

We agree that there may be state-specific circumstances that justify 

departures from benchmarks HHS considers as starting points. 

Nevertheless, we believe that, given the potential impact on federal 

Medicaid spending, HHS and states should justify and document any 

significant departures from those starting points. In conducting our 

assessment, we interviewed HHS officials and Illinois and Wisconsin state 

 1

HHS also stated that the 0.7 percent per year state historical average enrollment growth 

rate we cite for South Carolina (table 2) is in error, because its records showed that South 

Carolina’s historical average for enrollment growth was 1.0 percent. In verifying the state’s 

historical enrollment rate, we noted that the rate had been “rounded up” to the next full 

percentage from the 0.7 percent actual historical rate. For consistency with other rates in 

the table, we did not round it. 

GAO’s Response to 

the Department of 

Health and Human 

Services’ Specific 

Comments on GAO’s 

Findings 

Effect of HHS-Approved 

Pharmacy Plus 

Demonstrations on 

Federal Medicaid 

Spending 
Appendix III: Comments from the Department 

of Health and Human Services 

Page 60 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

officials and requested all documents that were considered in their budget 

neutrality negotiations. Those interviews and documents, which we 

discussed in the draft report, did not fully support the higher growth rates 

that were approved. We note that enrollment growth rates, in particular, 

can have a significant multiplier effect on future spending estimates. 

Further, we note that HHS allowed at least one state to argue for a higher 

growth rate using broad justifications—such as the effect of the Social 

Security Administration’s nationwide outreach program for low-income 

Medicare beneficiaries—that other states could also have used but did not, 

raising questions of clarity and consistency in both the process and the 

final decisions. 

Documentation of HHS’s approval decisions and the basis for approved 

spending limits could provide a rationale for higher cost and enrollment 

growth rates and offer guidance and assurance of consistent treatment to 

other states applying for Pharmacy Plus demonstrations. Absent such 

documentation, neither HHS nor the states have adequately justified the 

departures from states’ historical growth rates or the CMS Actuary’s 

growth projections in establishing states’ spending limits. 

In its comments, HHS stated that the federal review process for Pharmacy 

Plus demonstration proposals is similar to the review process for other 

Medicaid section 1115 demonstrations, indicating that the process is 

necessarily interactive and involves numerous meetings within the federal 

team and with states. We acknowledge that the review process for 

Medicaid section 1115 demonstration proposals benefits from being 

inclusive and interactive, and we are not suggesting that HHS should 

establish a new or different review process specifically for the Pharmacy 

Plus demonstrations. Our concern is that the basis for its decisions and 

any agreed-upon spending limit be clear and justified, not only for 

Pharmacy Plus demonstrations but for all section 1115 approvals. As noted 

in the draft report, the concerns raised by HHS’s approved Pharmacy Plus 

demonstrations parallel those we have raised about other section 1115 

waiver demonstration approvals over the past decade, including concerns 

about the extent to which the department is protecting the Medicaid 

program’s fiscal integrity and the need for clear criteria and a public 

process in reviewing and approving demonstrations. 

HHS commented that the department plans to continue working with 

states toward developing useful program evaluations based on consistent 

data collection as well as sufficient, consistent, and timely monitoring 

information. HHS also plans to make results of the independent Pharmacy 

HHS’s Review Process 

and Basis for Approvals 

Approved Demonstrations’ 

Evaluation and Monitoring 

Requirements 
Appendix III: Comments from the Department 

of Health and Human Services 

Page 61 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

Plus evaluation available on the CMS Web site. With regard to states’ own 

evaluations, HHS emphasized practical limitations, such as constraints on 

state financial and staff resources, indicating that while states ideally 

would develop evaluation plans before implementing demonstrations, in 

practice such plans often change. HHS commented that it obtains 

sufficient information for monitoring the demonstrations through 

telephone contacts and progress reports that respond to an example 

outline the department provided to each demonstration state. 

We recognize that state resources are limited, demonstration 

implementation tends to be a higher priority than evaluation, and the 

independent contractor evaluation of Pharmacy Plus will provide 

substantial information. Nonetheless, the lack of action to monitor key 

information—such as whether demonstration enrollees are being diverted 

from Medicaid—to plan how their evaluations will be conducted, or to 

collect data needed for such evaluations suggests a low priority for 

ensuring that evaluations can and will be done. HHS needs to ensure that 

states provide sufficient, consistent, and timely information for both 

demonstration monitoring and for determining whether the 

demonstrations are functioning as intended and to ensure that evaluation 

plans are put into place. 
Appendix IV: Comments from the State of 

Florida 

Page 62 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

Appendix IV: Comments from the State of 

Florida 
Appendix V: Comments from the State of 

Illinois 

Page 63 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

Appendix V: Comments from the State of 

Illinois 
Appendix V: Comments from the State of 

Illinois 

Page 64 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 
Appendix VI: Comments from the State of 

Wisconsin 

Page 65 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

Appendix VI: Comments from the State of 

Wisconsin 
Appendix VI: Comments from the State of 

Wisconsin 

Page 66 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 
Appendix VI: Comments from the State of 

Wisconsin 

Page 67 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 
Appendix VI: Comments from the State of 

Wisconsin 

Page 68 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 
Appendix VI: Comments from the State of 

Wisconsin 

Page 69 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 
Appendix VI: Comments from the State of 

Wisconsin 

Page 70 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

In addition to overall comments on our draft report contained in its letter 

and discussed in the body of this report, Wisconsin provided 11 specific 

comments in an attachment to its letter, which is reproduced on pages 67 

through 69. Our responses to Wisconsin’s specific comments are 

numbered below to correspond with each of the state’s numbered 

comments. 

1. Wisconsin commented that our $416 million figure (the estimated 

federal share of the difference between HHS-approved and benchmark 

5-year spending limits in table 3) exaggerates the federal fiscal effect, 

because the actual costs of the demonstration’s first years have come 

in under the projected costs. The state currently projects federal costs 

for the new drug benefit under the demonstration totaling $250 million 

over 5 years instead of roughly $537 million, which is the federal share 

of $919 million approved for the new benefit (see table 1). Although we 

recognize that the actual costs of Wisconsin’s demonstration to date 

are less than the costs projected at the time the waiver was approved, 

our analysis examined the extent to which HHS ensured that the 

demonstrations—in the form they were approved—maintained 

spending limits that were budget neutral to the federal government. 

Because Wisconsin’s approved spending limit represents the total 

amount the state is authorized to spend over the demonstration’s 5-

year life-span, the federal government could be liable for as much as 

$416 million more than what it would have been liable for had HHS 

held the state to a spending limit based on benchmark rates (see table 

3). 

2. Wisconsin commented that it is unreasonable to hold HHS to applying 

the lower of two benchmark growth rates in calculating budget 

neutrality: state experience or projections by the Centers for Medicare 

& Medicaid Services’ (CMS) Actuary for Medicaid costs. The state also 

expressed concern that our analysis did not incorporate factors other 

than the benchmarks that affect program growth. We believe that it is 

reasonable to expect HHS to use objective benchmark growth rates in 

projecting the Medicaid costs on which it bases spending limits and to 

document its reasons for deviating from those benchmarks—even if 

the department regards them as starting points. Otherwise, the 

department’s rationale for setting higher spending limits (based on 

higher growth rates) for some states than for others is not apparent to 

other states involved in waiver negotiations and reviews. As noted in 

the draft report, HHS responded to Wisconsin’s request for higher 

growth rates but did not, in our view, adequately document the basis 

for approving higher rates. In our own analysis of the spending limits, 

we did not include the additional factors that Wisconsin asserted 

GAO’s Response to 

the State of 

Wisconsin’s Specific 

Comments 
Appendix VI: Comments from the State of 

Wisconsin 

Page 71 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

should raise its spending limits because neither the state nor HHS 

provided adequate support to justify doing so. 

3. Wisconsin stated that our interpretation was unreasonably narrow in 

not accounting for potential savings accruing to Medicare, as well as to 

Medicaid, from expanding prescription drug coverage for seniors. We 

considered savings to Medicaid alone because HHS allows states to 

include savings only to Medicaid, not Medicare, in determining 

whether their Medicaid demonstrations are budget neutral. 

4. Wisconsin commented that because its historical cost growth rate has 

been rising, it was appropriate for HHS to calculate the state’s 

spending limit using a rate higher than its historical 5-year average. We 

believe that whenever HHS allows growth rate projections that exceed 

its benchmarks, it should document the basis for this deviation. 

5. Wisconsin mentioned two state programs that it believes will, like the 

Social Security Administration’s outreach program for low-income 

Medicare beneficiaries, help increase senior enrollment in Wisconsin’s 

Medicaid program because they are likely to identify individuals who 

qualify for full Medicaid benefits. But the state did not quantify or 

provide any data or other evidence to show the potential effects of 

these programs or of Social Security Administration outreach. We did 

not include these effects in our benchmark analysis for the same 

reason we did not include other factors that Wisconsin believed should 

raise is spending limit (see our response to comment 2). 

6. Wisconsin noted that we found no firm evidence to support the idea 

that expanding drug coverage would produce significant savings in 

Medicaid by diverting or delaying Medicaid enrollment. The state 

asserts that this criticism ignores the central purpose of these 

demonstrations: to determine if an important health care benefit can 

be delivered cost effectively. We acknowledge the value of 

demonstrations to test health care alternatives, but we believe that the 

case for substantial savings to Medicaid due to expanded prescription 

drug coverage is not well supported. We also believe that HHS has not 

done enough to ensure that states develop and implement 

demonstration evaluation designs. Although we do not dispute 

Wisconsin’s comment that research suggests coverage of prescription 

drugs benefits seniors, we believe that demonstrating the effects of 

drug coverage on avoiding Medicaid enrollment is a separate issue. 

7. Wisconsin has interpreted our mention of congressional concern about 

the extent to which HHS has ensured that section 1115 demonstration 

waivers promote the goals of Medicaid as implying that the state’s 
Appendix VI: Comments from the State of 

Wisconsin 

Page 72 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

demonstration is not providing critical prescription drugs to a 

vulnerable elderly, low-income, uninsured population. We did not 

intend to suggest that Wisconsin’s demonstration is not a valuable 

benefit to these individuals. We were referring to our earlier work on 

section 1115 Medicaid and State Children’s Health Insurance Program 

(SCHIP) demonstrations, which, in addition to raising concerns about 

HHS’s use of section 1115 waiver authority to approve demonstration 

spending limits that were not budget neutral, also found that HHS was 

allowing states to use unspent SCHIP funding to cover childless adults, 

despite SCHIP’s statutory objective of expanding health coverage to 

low-income children.1

8. Wisconsin commented that we mischaracterized the growth rates 

approved by HHS for the state’s demonstration as too high. See our 

response to comment 2. 

9. Wisconsin objected to our conclusion that the lack of available 

information on how these demonstrations are operating compromises 

attempts to assess whether they are operating as intended. This 

statement does not apply to any one state alone but synthesizes our 

findings for the four approved demonstrations taken together. We 

acknowledge that Wisconsin has been responsive to HHS’s 

requirements for informative and timely progress reports and have 

revised our report as appropriate. 

10. Wisconsin stated that its data reporting system allows its staff to 

monitor that the demonstration is operating as intended. In the draft 

report, we noted that Wisconsin officials reported having the capability 

for monitoring. We have not assessed Wisconsin’s monitoring system. 

11. Wisconsin commented on the importance of, and Wisconsin’s full 

participation in, CMS’s contracted independent evaluation as an 

effective approach to reviewing the agency’s assumptions relating to 

budget neutrality and program effectiveness. We believe the draft 

report captured the plans for this independent evaluation, as well as 

the apparent confusion over each state’s responsibility for conducting 

 1

See GAO-02-817 and U.S. General Accounting Office, SCHIP: HHS Continues to Approve 

Waivers That Are Inconsistent with Program Goals, GAO-04-166R (Washington, D.C.: Jan. 

5, 2004). 
Appendix VI: Comments from the State of 

Wisconsin 

Page 73 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

its own evaluation. We have revised our report to reflect that 

Wisconsin officials believe the state is not required to conduct an 

evaluation, whereas HHS officials told us the state would be required 

to do so. 
Appendix VII: GAO Contact and Staff 

Acknowledgments 

Page 74 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

Katherine Iritani, (206) 287-4820 

In addition, Tim Bushfield, Ellen W. Chu, Helen Desaulniers, Behn Kelly, 

Suzanne Rubins, Ellen M. Smith, and Stan Stenersen made key 

contributions to this report. 

Appendix VII: GAO Contact and Staff 

Acknowledgments 

GAO Contact 

Acknowledgments 
Related GAO Products 

Page 75 GAO-04-480 Medicaid Pharmacy Plus Demonstrations 

SCHIP: HHS Continues to Approve Waivers That Are Inconsistent with 

Program Goals. GAO-04-166R. Washington, D.C.: January 5, 2004. 

Medicaid and SCHIP: Recent HHS Approvals of Demonstration Waiver 

Projects Raise Concerns. GAO-02-817. Washington, D.C.: July 12, 2002. 

Medicare and Medicaid: Implementing State Demonstrations for Dual 

Eligibles Has Proven Challenging. GAO/HEHS-00-94. Washington, D.C.: 

August 18, 2000. 

Medicaid Section 1115 Waivers: Flexible Approach to Approving 

Demonstrations Could Increase Federal Costs. GAO/HEHS-96-44. 

Washington, D.C.: November 8, 1995. 

Medicaid: State Flexibility in Implementing Managed Care Programs 

Requires Appropriate Oversight. GAO/T-HEHS-95-206. Washington, D.C.: 

July 12, 1995. 

Medicaid: Statewide Section 1115 Demonstrations’ Impact on 

Eligibility, Service Delivery, and Program Cost. GAO/T-HEHS-95-182. 

Washington, D.C.: June 21, 1995. 

Medicaid: Spending Pressures Drive States toward Program 

Reinvention. GAO/T-HEHS-95-129. Washington, D.C.: April 4, 1995. 

Medicaid: Spending Pressures Drive States toward Program 

Reinvention. GAO/HEHS-95-122. Washington, D.C.: April 4, 1995. 

Medicaid: Experience with State Waivers to Promote Cost Control and 

Access to Care. GAO/T-HEHS-95-115. Washington, D.C.: March 23, 1995. 

Related GAO Products 

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