MEDICAID 

DEMONSTRATIONS

Federal Action 

Needed to Improve 

Oversight of Spending

Report to the Chairman, 

Committee on Finance, 

U.S. Senate

April 2017

GAO-17-312

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-17-312, a report to the 

Chairman, Committee on Finance, U.S. 

Senate.

April 2017

MEDICAID DEMONSTRATIONS

Federal Action Needed to Improve Oversight of 

Spending 

What GAO Found

Over the last decade, federal spending under Medicaid section 1115 

demonstrations, which allow states flexibility to test new approaches for 

delivering Medicaid services, has increased significantly.

Federal Expenditures under Medicaid Section 1115 Demonstrations, Fiscal Years 2005, 2010, 

and 2015

The Centers for Medicare & Medicaid Services (CMS), within the Department of 

Health and Human Services (HHS), took a number of steps to monitor 

demonstration spending in GAO’s 4 selected states. However, GAO also found 

inconsistencies in CMS’s monitoring process. For example, CMS did not 

consistently require selected states to report the information needed to assess 

compliance with demonstration spending limits. The inconsistencies may have 

resulted from a lack of written standard procedures. CMS officials told GAO that

CMS was developing procedures to better standardize monitoring, but did not 

have detailed plans for doing so. Thus, it is too soon to determine whether these 

efforts will address the inconsistencies GAO found. Federal standards require 

that federal agencies design control activities to achieve objectives. Without 

standard, documented procedures, CMS may not identify cases where states are 

inappropriately using federal funds or exceeding spending limits.

In applying demonstration spending limits, CMS allowed states to accrue 

unspent funds (more specifically, unused spending authority) when state 

spending is below the limit and use them to finance expansions of the original

demonstration. For example, CMS allowed New York to use $8 billion in unspent 

federal funds to expand its demonstration to include an incentive payment pool 

for Medicaid providers. In May 2016, CMS released a slide presentation outlining 

new restrictions on the accrual of unspent funds. Per federal standards, formal 

guidance helps ensure that policies are consistently carried out. However, CMS 

has not issued formal guidance on the policy and does not consistently track

unspent funds under the spending limit, raising questions as to whether the 

revised policy will be effective in better controlling costs.

View GAO-17-312. For more information, 

contact Katherine Iritani at (202) 512-7114 or 

iritanik@gao.gov.

Why GAO Did This Study

As of November 2016, 37 states had 

demonstrations under section 1115 of 

the Social Security Act, under which

the Secretary of HHS may allow costs 

that Medicaid would not otherwise 

cover for state projects that are likely to 

promote Medicaid objectives. By

policy, demonstrations must be budget 

neutral; that is, the federal government 

should spend no more for a state’s 

Medicaid program than it would have 

spent without the demonstration. CMS 

is responsible for monitoring spending 

and assessing compliance with 

demonstration terms and conditions for 

how funds can be spent and applying

spending limits to maintain budget 

neutrality. 

GAO was asked to examine federal 

spending for demonstrations and 

CMS’s oversight of spending. This 

report examines (1) federal spending 

over time, (2) CMS’s monitoring 

process, and (3) CMS’s application of

spending limits. GAO reviewed federal 

expenditure data for fiscal years 2005-

2015, relevant documentation for 4

states, selected based on variation 

among their demonstrations, and 

federal internal control standards, and 

also interviewed CMS and state 

Medicaid officials.

What GAO Recommends

GAO recommends that CMS (1) 

develop and document standard 

operating procedures for sufficient 

reporting requirements and to require 

consistent monitoring and (2) issue 

formal guidance on its revised policy

for restricting accrual of unspent funds.

HHS agreed with GAO’s first 

recommendation and neither agreed 

nor disagreed with GAO’s second 

recommendation.
Page i GAO-17-312 Medicaid Demonstration Spending Oversight

Letter 1

Background 4

Federal Spending under Demonstrations Grew Significantly over 

the Past Decade and Represents a Third of All Medicaid 

Spending 8

CMS’s Monitoring of Demonstration Spending Lacked 

Consistency 12

CMS Is Implementing a Revised Policy for Applying Spending 

Limits, but the Extent to Which It Will Effectively Control Costs 

Is Unclear 18

Conclusions 24

Recommendations for Executive Action 25

Agency Comments and Our Evaluation 26

Appendix I Federal Spending for Medicaid Section 1115 Demonstrations, by 

State, Federal Fiscal Years 2005 and 2015 28

Appendix II Comments from the Department of Health and Human Services 30

Appendix III GAO Contact and Staff Acknowledgments 33

Table

Table 1: Federal Medicaid Section 1115 Demonstration 

Expenditures for Selected States, Fiscal Years 2011 

through 2015 12

Figures

Figure 1: Centers for Medicare & Medicaid Services (CMS) 

Oversight of Section 1115 Medicaid Demonstrations 7

Figure 2: Federal Expenditures under Medicaid Section 1115 

Demonstrations, Fiscal Years 2005, 2010, and 2015 9

Figure 3: Federal Expenditures under Section 1115 

Demonstrations as a Percentage of Total Federal 

Medicaid Expenditures, by State, Fiscal Year 2015 11

Figure 4: Comparison of Tennessee’s Actual Expenditures to 

Spending Limit, Demonstration Years 11-13 20

Contents
Page ii GAO-17-312 Medicaid Demonstration Spending Oversight

Figure 5: Expected Actual Expenditures and Accrued Unspent 

Funds for California, Demonstration Period 2016-2020 23

Abbreviations

CMS Centers for Medicare & Medicaid Services

DY demonstration year

HHS Department of Health and Human Services

PPACA Patient Protection and Affordable Care Act

STC special terms and conditions

This is a work of the U.S. government and is not subject to copyright protection in the 

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Page 1 GAO-17-312 Medicaid Demonstration Spending Oversight

441 G St. N.W.

Washington, DC 20548

April 3, 2017

The Honorable Orrin G. Hatch

Chairman

Committee on Finance

United States Senate

Dear Mr. Chairman:

In fiscal year 2015, federal spending for Medicaid section 1115 

demonstrations, which allow states to test and evaluate new approaches 

for delivering Medicaid services, was over a $100 billion.1 As of 

November 2016, 37 states were operating a portion of their Medicaid 

program under one or more of these demonstrations. Under section 1115 

of the Social Security Act, the Secretary of Health and Human Services 

may waive certain federal Medicaid requirements and allow costs that 

would not otherwise be eligible for federal funds for demonstration 

projects that, in the Secretary’s judgment, are likely to promote the 

objectives of the Medicaid program.2 For example, the Secretary has 

approved states’ proposals to extend Medicaid coverage under the 

demonstrations to populations or services that would not otherwise be

covered under traditional Medicaid. Under section 1115, the Secretary 

has also allowed states to use Medicaid funds to finance other types of 

costs, for example, those for state health programs or incentive payments 

to providers to improve access to and quality of care.

The Secretary of Health and Human Services has delegated 

responsibility for overseeing section 1115 demonstrations to the Centers 

for Medicare & Medicaid Services (CMS), the agency within the 

Department of Health and Human Services (HHS) that oversees 

Medicaid. CMS’s oversight responsibilities include monitoring 

demonstrations. This includes assessing whether states are complying 

with requirements for how federal funds can be spent under the 

demonstration and with limits on the amount of federal funds that can be 

 1

The Medicaid program—a joint, federal-state program that finances health care coverage 

for low-income and medically needy populations, including children and aged or disabled 

adults—covered an estimated 81 million individuals at an estimated cost of $524 billion in 

fiscal year 2015, including about $330 billion in federal spending and $194 billion in state 

spending. 

2

42 U.S.C. § 1315(a). 

Letter
Page 2 GAO-17-312 Medicaid Demonstration Spending Oversight

spent over the life of a demonstration, referred to as spending limits.3

CMS sets requirements for how funds can be spent, spending limits, how 

the limits will be enforced, and related state reporting requirements in the 

special terms and conditions (STC) for each demonstration, which 

represents the agreement between CMS and the state.

CMS policy requires that demonstrations be budget neutral to the federal 

government; that is, the federal government should spend no more for 

Medicaid under a state’s demonstration than it would have spent without 

the demonstration. A demonstration’s spending limit reflects CMS’s 

estimate of what the federal government would have spent without the 

demonstration. Ensuring that demonstrations are budget neutral depends 

both on how limits are set and how CMS applies the limits during the 

course of the demonstration. GAO found in past work that approved 

spending limits for some demonstrations were too high and, therefore, did 

not ensure that demonstrations were budget neutral.4

Given the significant amount of federal spending under demonstrations, 

as well as past concerns about whether demonstrations were budget 

neutral, you asked us to examine federal spending for Medicaid 

demonstrations and CMS’s monitoring of spending under demonstrations. 

This report examines the following:

1. Federal spending over time under Medicaid section 1115 

demonstrations.

2. CMS’s process for monitoring spending under section 1115 

demonstrations.

3. CMS’s application of demonstration spending limits.

To examine federal spending for Medicaid section 1115 demonstrations 

over time, we analyzed federal Medicaid expenditure data for fiscal years 

 3

A demonstration is typically approved for an initial 5-year period and can be renewed, 

subject to HHS approval, for subsequent demonstration periods. Some states have 

demonstrations that have been in place for decades. 

4

See GAO, Medicaid Demonstration Waivers: Recent HHS Approvals Continue to Raise 

Cost and Oversight Concerns, GAO-08-87 (Washington, D.C.: Jan. 31, 2008); Medicaid 

Demonstration Waivers: Approval Process Raises Cost Concerns and Lacks 

Transparency, GAO-13-384 (Washington, D.C.: June 25, 2013); and Medicaid 

Demonstrations: HHS’s Approval Process for Arkansas’s Medicaid Expansion Waiver 

Raises Cost Concerns, GAO-14-689R (Washington, D.C.: Aug. 8, 2014).
Page 3 GAO-17-312 Medicaid Demonstration Spending Oversight

2005 through 2015.5 Specifically, we reviewed data from CMS’s Quarterly 

Medicaid Statement of Expenditures for the Medical Assistance 

Program—known as the CMS-64 form—extracted on October 3, 2016.6

We reviewed the federal share of expenditures for section 1115 

demonstrations from fiscal years 2005 through 2015, including state-bystate and national expenditures. We analyzed spending under 

demonstrations as a share of total Medicaid spending over this time 

period.7 To assess the reliability of the federal expenditure data, we 

reviewed related documentation, including the forms used to collect the 

data and their instructions, and performed manual and electronic tests for 

outliers or anomalies. We also interviewed knowledgeable CMS officials 

about the data trends, quality, and limitations, including the steps they 

take to ensure data reliability. We determined that these data were 

sufficiently reliable for our purposes.

To examine CMS’s process for monitoring spending under 

demonstrations, we reviewed documentation for demonstrations in four 

states: California, Indiana, New York, and Tennessee. We selected states

with demonstrations that were at least 5 years old and that varied in terms 

of the approaches each state was testing under the demonstration. Our 

states also varied geographically. For each demonstration, we reviewed 

reporting requirements contained in the STCs that were in effect as of the 

end of 2015, as well as any renewals approved after that date.8 We also 

reviewed available quarterly and annual performance reports and 

quarterly expenditure reports for 2013 through 2015 submitted by those 

states to CMS to assess whether reports were consistent with reporting 

requirements. Finally, where relevant, we reviewed documentation of 

CMS deferrals of federal Medicaid funds—decisions to withhold payments 

to states until further review—related to the demonstrations in these 

 5

Throughout the report, we refer to the federal fiscal year as fiscal year. 

6

We reviewed data for the 50 states and the District of Columbia. For the purposes of this 

report, we included the District of Columbia as a state. State Medicaid agencies submit 

expenditure information to CMS on a quarterly basis by means of the CMS-64 form within 

the Medicaid Budget & Expenditure System. CMS collects data on Medicaid expenditures 

under section 1115 demonstrations on specific lines of the form. States have 2 years to 

report expenditures. As such, fiscal year 2015 was the most recent year of data that we 

determined was sufficiently reliable. 

7

We included medical expenditures in our analysis and excluded administrative 

expenditures. Medical expenditures represent the vast majority of spending under 

demonstrations, about 98.7 percent in fiscal year 2015. 

8

Renewals are also referred to as extensions by CMS. 
Page 4 GAO-17-312 Medicaid Demonstration Spending Oversight

states. To supplement our review, we interviewed CMS officials about 

their monitoring practices in general and for the demonstrations in our 

selected states, and we interviewed state Medicaid officials in the four 

states. In evaluating this information, we compared policies and 

procedures against GAO’s Standards for Internal Control in the Federal 

Government, which provide guidance to federal agencies on ensuring 

accountability.9

To examine how CMS applied demonstration spending limits, we 

interviewed CMS officials about their policy for applying spending limits 

and reviewed related documentation. We also reviewed the STCs for our 

selected states’ demonstrations to examine how CMS’s policies were 

reflected in the STCs. For the one selected state where sufficient data 

were available, we examined combined state and federal expenditures to 

compare actual spending to the demonstration spending limit.

We conducted this performance audit from September 2015 to April 2017 

in accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.

The federal government sets broad federal requirements for Medicaid—

such as requiring that state Medicaid programs cover certain populations 

and benefits—and matches state Medicaid expenditures with federal 

funds for most services.10 States administer their respective Medicaid 

programs on a day-to-day basis, and have the flexibility to, among other 

things, establish provider payment rates and cover many types of optional 

benefits and populations. Section 1115 demonstrations provide a further 

 9

GAO, Standards for Internal Control in the Federal Government, GAO-14-704G 

(Washington, D.C.: September 2014). Internal control is a process effected by an entity’s 

oversight body, management, and other personnel that provides reasonable assurance 

that the objectives of an entity will be achieved. 

10The federal government matches most state Medicaid expenditures according to the 

state’s Federal Medical Assistance Percentage. This percentage is calculated using a 

statutory formula based on the state’s per capita income in relation to the national per 

capita income. In fiscal year 2015, the matching rates ranged from 50 percent to 73.6 

percent.

Background
Page 5 GAO-17-312 Medicaid Demonstration Spending Oversight

way for states to innovate in ways that fall outside of many of Medicaid’s 

otherwise applicable requirements, and to receive federal matching 

Medicaid funds for costs that would not otherwise be matchable. For 

example, states may use these demonstrations to test new approaches 

for delivering care to generate savings or efficiencies or improve quality 

and access. Such changes have included expanding benefits to cover 

populations that would not otherwise be eligible for Medicaid, altering the 

state’s Medicaid benefit package, or financing payment pools, for 

example, for state-operated health programs or supplemental provider 

payments.11 Demonstrations are typically approved for an initial 5-year 

period that can be renewed for future demonstration periods. Some states 

have operated some or all of their Medicaid programs for decades under 

section 1115 demonstrations.

Each demonstration is governed by STCs, which reflect the agreement 

between CMS and the state. The STCs include any provisions governing 

spending under the demonstration. For example, STCs indicate for what 

populations and services funds can be spent. In states receiving approval 

to implement payment pools for state health programs and supplemental 

provider payments, the STCs could include parameters for payments 

under those pools. For example, they may require that payment pools be 

capped at certain levels. The STCs may also include criteria for providers 

to receive payments and protocols that states must have to ensure the 

appropriateness of the payments and allow CMS to review those 

payments. The STCs also include the limits on the amount of federal 

funds that can be spent on the demonstration—referred to as spending 

limits—and indicate how spending limits will be enforced. Finally, the 

STCs include the reporting requirements the state must meet. Reporting 

requirements—as contained in the STCs—may include regular telephone 

calls between the state and CMS, regular performance reports, and 

 11State-operated health programs could include outreach and treatment services for 

specific conditions, insurance subsidy programs, and workforce development programs. 

These programs could serve non-Medicaid populations. 

A state may make supplemental payments—that is, payments in addition to base 

payments for covered services—to its hospitals and other providers, through the use of 

pools of dedicated funds—called funding pools—in its demonstration program. These 

funding pools may be used for uncompensated care, delivery system improvements, or for 

other various purposes such as graduate medical education.

Demonstration Terms and 

Conditions
Page 6 GAO-17-312 Medicaid Demonstration Spending Oversight

quarterly expenditure reports. The STCs outline what the state should 

include in each of these reports, which can vary by demonstration.12

CMS policy requires that section 1115 demonstrations be budget neutral 

to the federal government—that is, the federal government should spend 

no more under a state’s demonstration than it would have spent without 

the demonstration. Once approved, each demonstration operates under a 

negotiated budget neutrality agreement, documented in its STCs, that 

places a limit on federal Medicaid spending over the life of the 

demonstration. This limit is referred to as the spending limit.13 If a state 

exceeds the demonstration spending limit at the end of the demonstration 

period, it must return the excess federal funds.

Spending limits can be a per person limit that sets a dollar limit for each 

Medicaid enrollee included in the demonstration in each month, a set 

dollar amount for the entire demonstration period regardless of the level 

of enrollment, or a combination of both. Spending limits are calculated by 

establishing a spending base and applying a rate of growth over the 

period of the demonstration. The spending base generally reflects a 

recent year of state expenditures for populations included in the 

demonstration, and the growth rate to be applied is generally based on 

the lower of a state-specific historical growth rate or a federal nationwide 

estimate.14 Different data elements may be required by CMS to assess a 

state’s compliance with the spending limit. For example, for a per person 

spending limit, which is generally a defined dollar limit per enrollee per 

month, CMS needs both expenditure and enrollment data to assess 

compliance with the spending limit. 

CMS is responsible for monitoring compliance with the STCs during the 

demonstration, including compliance with requirements around how 

Medicaid funds can be spent and spending limits. Monitoring efforts may 

 12Performance reports include quarterly and annual reports on the topics that are listed in 

the STCs. These may be specific to the demonstration. 

13According to CMS policy, the spending limits for demonstrations are to be based on the 

projected cost of continuing states’ existing Medicaid programs without a demonstration.

The higher these projected costs, the higher the spending limit, and the more federal 

funding states are potentially eligible to receive for the demonstration, in the form of a 

federal match of their actual expenditures. 

14CMS actuaries prepare nationwide projections of growth in preparing CMS’s annual 

budget estimates. 

Demonstration Spending 

Limits

Demonstration Monitoring
Page 7 GAO-17-312 Medicaid Demonstration Spending Oversight

include reviewing performance reports and quarterly financial reporting 

required under the STCs and discussing questions and concerns with the 

state. When a state seeks a renewal of a demonstration, that request 

offers CMS an opportunity to negotiate revisions to the STCs with the 

state, which could include changes to spending limits and reporting 

requirements. (See fig. 1.)

Figure 1: Centers for Medicare & Medicaid Services (CMS) Oversight of Section 1115 Medicaid Demonstrations

States are required to report Medicaid expenditures, including 

expenditures under demonstrations, to CMS at the end of each quarter. 

CMS reviews these expenditures on a quarterly basis for 

reasonableness.15 If, during the expenditure review, CMS is uncertain as 

to whether a particular state expenditure is allowable, then CMS may 

 15CMS reviews demonstration expenditures as part of the agency’s review of all Medicaid 

expenditures. In part, these reviews are used to reconcile state estimates of projected 

spending—on which basis CMS makes funds available to the states—with actual 

expenditures.
Page 8 GAO-17-312 Medicaid Demonstration Spending Oversight

withhold payment pending further review (referred to as a deferral).16 With 

regard to reporting on expenditures under demonstrations, the STCs 

dictate the level of detail that the state is required to include in the 

quarterly expenditure reporting. For example, they might require the state 

to report expenditures by population and by payment pool approved 

under the demonstration.

Federal spending under section 1115 Medicaid demonstrations increased 

significantly from fiscal year 2005 through fiscal year 2015, rising from 

$29 billion in 2005 to over $100 billion in 2015.17 Federal spending on 

demonstrations also increased as a share of total federal Medicaid 

spending during the same period, rising from 14 percent of all federal 

Medicaid spending in fiscal year 2005 to 33 percent in fiscal year 2015. 

(See fig. 2.) Several factors likely contributed to these trends.18 First, the 

number of states with demonstrations increased during this period, with 

31 states reporting demonstration expenditures in fiscal year 2005 and 40 

reporting such expenditures in fiscal year 2015. Second, some states 

expanded their demonstrations over this period, with demonstration 

spending in 24 states representing a greater proportion of total Medicaid 

spending in fiscal year 2015 than in fiscal year 2005. For example, CMS 

officials told us that, during this period, some states shifted expenditures 

for managed care and home and community based services from other 

Medicaid authorities to section 1115 demonstrations.19 In addition, during 

2010 through 2015, a number of states expanded coverage through 

 16CMS withholds the amount associated with the deferral from future funding for the state 

until the deferral is resolved. 

17For this analysis, expenditures were adjusted for inflation using the gross domestic 

product price index to 2015 dollars. 

18We did not assess all of the factors that may have contributed to growth in federal 

demonstration spending during this period.

19Under a managed care delivery model, states typically contract with managed care 

organizations to provide a specific set of Medicaid-covered services to beneficiaries and 

pay them a set amount per beneficiary per month to provide those services. Home and 

community based services include such services as home health and adult day care and 

are available for individuals of all ages who have limited ability to care for themselves 

because of physical, cognitive, or mental disabilities or conditions.

Federal Spending 

under 

Demonstrations Grew 

Significantly over the 

Past Decade and 

Represents a Third of 

All Medicaid 

Spending
Page 9 GAO-17-312 Medicaid Demonstration Spending Oversight

demonstrations to low-income adults, which, as CMS officials told us, 

likely contributed to the increase in demonstration spending.20

Figure 2: Federal Expenditures under Medicaid Section 1115 Demonstrations, 

Fiscal Years 2005, 2010, and 2015

Note: For this analysis, expenditures were adjusted for inflation using the gross domestic product 

price index to 2015 dollars. We included data on medical spending and excluded administrative costs.

Demonstration spending as a proportion of total federal Medicaid 

spending varied across states and represented most—75 percent or 

more—of Medicaid spending in 10 of the 40 states that reported 

expenditures in fiscal year 2015. (See fig. 3.) Further, in 5 of these 10 

states, demonstration spending represented more than 90 percent of the 

 20In January 2014, the federal government began providing additional federal funds for 

the cost of covering low-income adults (individuals at or below 133 percent of the federal 

poverty level) newly eligible under the Patient Protection and Affordable Care Act 

(PPACA). The law also provides for a 5 percent income disregard when calculating an 

individual’s income to determine Medicaid eligibility, which effectively raises the eligibility 

limit for these individuals to 138 percent of the federal poverty level.
Page 10 GAO-17-312 Medicaid Demonstration Spending Oversight

state’s total federal Medicaid spending.21 In contrast, in fiscal year 2005, 

spending under demonstrations did not exceed 75 percent of total 

Medicaid spending in any state. In that year, demonstration spending 

represented between 25 percent and 75 percent of total Medicaid 

spending in 10 states and less than 25 percent in 21 states. (See app. I.)

 21Those five states whose reported demonstration expenditures exceeded 90 percent of 

their Medicaid expenditures were Arizona (99.7 percent), Hawaii (93 percent), Kansas (94 

percent), New Mexico (93 percent), and Vermont (99 percent). 
Page 11 GAO-17-312 Medicaid Demonstration Spending Oversight

Figure 3: Federal Expenditures under Section 1115 Demonstrations as a Percentage of Total Federal Medicaid Expenditures,

by State, Fiscal Year 2015

Note: We included data on medical spending and excluded administrative costs. States have 2 years 

to report spending; therefore, states may have reported expenditures for fiscal year 2015 even if the 

state did not have an active demonstration that year. Data for New York may underestimate the 

proportion of total Medicaid spending that demonstration spending represented because New York’s 

expenditure reporting for fiscal year 2015 was incomplete.
Page 12 GAO-17-312 Medicaid Demonstration Spending Oversight

The extent to which demonstration spending changed over time varied 

across states, as illustrated by the most recent 5 years of spending data 

in our selected states. In two of our four selected states—California and 

Indiana—spending under demonstrations increased between fiscal years 

2011 and 2015, consistent with the national trend. (See table 1.) 

California’s demonstration spending increased the most significantly—

more than tripling—during this time frame, during which the state 

expanded its demonstration to, among other things, provide coverage to 

low-income adults. Indiana reported a 22 percent increase in 

demonstration spending between fiscal years 2011 and 2015. In contrast, 

Tennessee reported a 3 percent decrease during that period. With regard 

to the change in the proportion of total Medicaid spending that 

demonstrations represented, the proportion did not change between 2011 

and 2015 for Indiana and Tennessee and doubled in California, from a 

quarter of its total Medicaid expenditures in 2011 to half of its total 

Medicaid expenditures in 2015. We could not assess the change in 

spending for the fourth state—New York—because the state’s 

expenditure reporting for fiscal year 2015 was incomplete.22

Table 1: Federal Medicaid Section 1115 Demonstration Expenditures for Selected 

States, Fiscal Years 2011 through 2015

State 2011 (in millions) 2015 (in millions) Total for all years 

2011-2015 

(in millions)

California $8,804 $29,272 $76,450

Indiana $1,300 $1,581 $7,783

Tennessee $5,024 $4,867 $24,946

Source: GAO analysis of Centers for Medicare & Medicaid Services demonstration expenditures data, as of October 3, 2016. | 

GAO-17-312

Note: For this analysis, expenditures were adjusted for inflation using the gross domestic product 

price index to 2015 dollars. We included data on medical spending and excluded administrative costs.

We found that CMS took a number of steps to monitor demonstration 

spending in our selected states. For example, CMS held calls with states 

and performed various steps to assess the appropriateness of 

expenditures.

 22As of October 3, 2016, New York reported $880 million for fiscal year 2015. By 

comparison, the state reported $10.6 billion for 2014 and $7.9 billion for 2013. 

CMS’s Monitoring of 

Demonstration 

Spending Lacked 

Consistency
Page 13 GAO-17-312 Medicaid Demonstration Spending Oversight

• Held monitoring calls. CMS and state officials told us that they held 

monitoring telephone calls to discuss any significant current or 

expected developments in the demonstrations.23 CMS officials 

confirmed they may use the calls to obtain information to supplement 

their review of states’ performance and expenditure reports. For 

example, CMS officials said they used the calls with Tennessee to 

raise questions about the content of the state’s submitted quarterly 

reports. In addition, California officials told us that CMS used these 

calls to get updates and supporting documentation on state programs.

• Checked for the appropriateness of expenditures. In reviewing the 

quarterly expenditure reports, CMS officials told us that they assessed 

the appropriateness of expenditures. For example, the agency 

checked that the amounts claimed complied with federal requirements 

for matching funds. As a result of these checks, CMS issued several 

deferrals to withhold payment of federal funds to California until the 

state could account for expenditures claimed.24 Officials also told us 

that as part of the checks, they assessed the appropriateness of pool 

payments, such as those for supplemental payments to providers, 

where relevant. Assessing the appropriateness of pool payments 

involves ensuring that pool payments align with the approved 

purposes of the pool and that the payments were made to approved 

providers.25 For example, CMS officials told us that for one of the 

pools in the New York demonstration, agency staff checked whether 

the payments made were to eligible providers, the requirements of 

which were described in the STCs. As a result of this review, CMS 

deferred providing over $38 million in federal funds to New York for 

payments made to providers under the pool in the quarter ending 

March 31, 2016, until the state could provide documentation that the 

providers were eligible to receive payment. CMS officials also told us 

that they checked to ensure that the state was not receiving funds 

 23Although the STCs stipulate that monitoring calls be held monthly, both CMS and some 

state Medicaid officials confirmed that they can be held more frequently, and that the 

relationship between the state and the agency is such that calls can occur on an ad hoc 

basis.

24For example, CMS deferred over $140 million in federal funds claimed for a low-income 

health program approved under the demonstration. In the letter communicating the 

deferral decision to the state, CMS required that the state provide supporting 

documentation for the expenditures claimed. 

25Monitoring the appropriateness of payments made under the pools is important given 

that we previously reported on concerns that HHS has not always clarified what, precisely, 

approved pool expenditures are for and how they will promote Medicaid objectives. See 

GAO-15-239.
Page 14 GAO-17-312 Medicaid Demonstration Spending Oversight

from other federal funding sources that are intended to serve the 

same purposes as funds in their payment pools (i.e., duplicating 

federal funds), and that the state’s share of funding for the pools is 

from permissible sources, such as the state’s general revenue.26

According to CMS officials, as a result of the agency’s checks of 

spending for New York’s demonstration, CMS identified $172 million 

in federal funds that were inappropriately used to finance the state 

share of demonstration costs. CMS recovered these funds in fiscal 

year 2015.

However, we also found inconsistencies in CMS’s monitoring process that 

potentially limited the effectiveness of the agency’s monitoring efforts in 

the selected states. The inconsistencies included the following:

• Reporting requirements were sometimes insufficient to provide 

information needed to assess compliance with spending limits. 

CMS did not consistently require states to report the elements needed 

for the agency review staff to compare actual demonstration spending 

to the spending limit. For example, although CMS needs states to 

report the number of enrollees per month—referred to as member 

months—to assess compliance with per person spending limits, the 

agency only required such reporting for two of the four selected 

states’ demonstrations. CMS acknowledged that having member 

month data is important to assess spending limit compliance.27 For 

example, CMS did not require California to report enrolled member 

months for its demonstration from 2010 to 2015, but the agency 

amended the STCs to include this requirement when the state’s 

demonstration was renewed beginning in 2016. Including this 

requirement will prevent CMS from having to use alternative means to 

gain necessary information for this compliance assessment. For 

example, CMS officials said that they have used monitoring calls to 

obtain the missing enrollment information from the state.

• Enforcement of expenditure reporting requirements was 

inconsistent. We found that the selected states did not report 

demonstration expenditures in all of the categories specified under 

 26CMS performs checks for federal fund duplication and the source of the state’s share of 

funds for pool payments given applicable restrictions in New York’s STCs. CMS officials 

said that they did similar checks for the California and Tennessee demonstrations where 

applicable. 

27To assess compliance with a per person spending limit, CMS needs enrollment data, 

specifically, enrolled member months, from the state. CMS multiplies enrollment by the 

per person limit to get a total, and then compares actual spending to that total.
Page 15 GAO-17-312 Medicaid Demonstration Spending Oversight

their demonstration STCs. For example, California’s expenditure 

reporting did not align with the STC reporting requirements for 2010 

through 2015. California officials told us this was largely because 

CMS had not enforced the reporting requirements prior to 2015. 

Therefore, based on our review, CMS would not be able to assess 

compliance with the spending limit for California using the data 

included in its expenditure report, if CMS tried to do so.28

• Monitoring compliance with spending limits was inconsistent. 

CMS did not consistently assess compliance with the spending limit in 

all our selected states. CMS officials told us that they assessed 

compliance with the spending limits on a quarterly basis for the 

demonstrations in Tennessee and Indiana.29 However, the agency did 

not regularly assess compliance for the California and New York 

demonstrations—which represented tens of billions of dollars in 

federal spending annually—due to limitations in the state-reported 

expenditure data.

30 CMS officials told us that they did not assess 

California’s compliance with the spending limit because the 

expenditure data submitted by the state was not accurate. 

Furthermore, the agency’s focus was on resolving a number of 

broader financial compliance issues in the state (see sidebar), the 

resolution of which, according to officials, was necessary before the 

agency could assess compliance with the spending limit. With regard 

to New York, CMS had not assessed compliance with the spending 

limit since 2011, because the state’s reporting of expenditures has 

been significantly incomplete since then. According to CMS officials, 

significant staff transitions disrupted New York’s ability to report 

expenditures to CMS as required. The state delayed reporting 

expenditures, and it did not report them in the categories specified in 

the STCs.31 Although CMS did not assess compliance with the 

 28In August 2016, California officials told us that the state was in the process of modifying 

its expenditure system so that the reports will align with the STC requirements.

29Our review of the demonstration documentation submitted by Tennessee and Indiana 

confirmed that the states submitted the enrollment and expenditure data that would be 

necessary for CMS to conduct regular assessments of compliance.

30As previously mentioned, federal spending for California’s demonstration was over $29 

billion in fiscal year 2015. New York’s expenditure reporting for fiscal year 2015 was 

incomplete. However, the state reported $10.6 billion in federal spending for its 

demonstration for fiscal year 2014.

31In December 2016, CMS approved a renewal of New York’s demonstration and, as part 

of the renewal, required that New York work closely with the agency to bring its reporting 

into compliance with demonstration requirements by September 2017 or be subject to 

corrective action.
Page 16 GAO-17-312 Medicaid Demonstration Spending Oversight

spending limit for either of these two states, officials told us that they 

were not concerned that California or New York exceeded their 

spending limits because the limits in those states have historically 

been higher than actual spending.

These inconsistencies may have resulted, in part, from CMS’s lack of 

written, standard operating procedures for monitoring spending under 

demonstrations. For example, CMS does not have internal guidance on 

the elements that must be included in reporting requirements for states. In 

addition, regarding the state performance reports, CMS does not have a 

review protocol or a requirement that staff check that reports contain the 

elements required by the STCs, for example, enrollment data needed to 

assess a state’s compliance with the spending limit. CMS has written 

materials to train staff on how spending limits are set and how 

demonstration spending is monitored. However, these materials are 

limited to high-level descriptions of the monitoring roles and do not 

contain specific procedures for staff to use in monitoring.32 Regarding the 

review of quarterly expenditure reports, CMS has guidance for agency 

staff who review them, but the guidance lacks detailed direction on what 

checks of demonstration expenditure data should occur.33

CMS also lacks standard procedures for documenting its monitoring 

efforts. For example, the agency has no written requirements for its staff 

to document that required performance reports have been submitted by 

the states. Furthermore, the agency does not require its staff to document 

the content of monitoring calls, including any concerns and potential 

resolutions discussed. In addition, CMS does not require its staff to 

systematically document checks performed for state compliance with 

demonstration spending limits or the appropriateness of pool payments. 

According to CMS officials, while there are not written requirements to do 

so, there is an expectation that staff maintain documentation of their 

monitoring efforts. However, officials also told us that any documentation 

of checks that a demonstration complied with its spending limits is likely 

included in the personal notes of individual CMS staff. As such, they may 

not necessarily be accessible to all staff who have oversight responsibility 

of the demonstration. One example of evidence we observed of CMS 

documenting its monitoring efforts was when checks for appropriateness 

 32CMS officials said that these training materials are used as a part of its required 

orientation program for new staff. 

33For example, the guidance instructs the reviewers to determine whether the 

expenditures reported are in compliance with the STCs and reported on the correct form.
Page 17 GAO-17-312 Medicaid Demonstration Spending Oversight

of expenditures resulted in a deferral of federal funds, which were 

documented in letters to the states.

CMS officials told us that they are in the early stages of developing 

standard operating procedures and a management information system to 

better standardize the monitoring of demonstrations:

• Standard operating procedures. CMS officials told us that they are 

developing protocols for monitoring state demonstration programs and 

state compliance with demonstration spending limits. Officials told us 

that the protocols would outline staff roles and responsibilities. 

Officials also told us that they are working on standardizing the format 

and content of required state performance reports, which could help 

ensure that CMS is receiving the information needed to monitor 

spending under the demonstration. As of December 2016, CMS 

officials expected that the first phase of standard procedures, which 

will focus on assessments of compliance with the spending limit, will 

be developed and documented in the next year. They explained that 

developing the procedures is an iterative process and that it could 

take the agency 2 years to completely develop and document its 

plans.

• Management information system. CMS officials also told us that 

they are in the initial phases of building a management information 

system to facilitate and document demonstration oversight. The first 

part of the system, which was in use as of September 2016, allowed 

CMS to centralize the collection of state demonstration performance 

reports. In future phases of system development, officials told us that 

the system will include alerts for missing reports or incomplete 

reviews and prompts for CMS’s staff to document completion of 

monitoring checks. CMS also plans for the system to include a 

database of demonstration STCs that CMS staff can search, which 

could help to ensure that STCs consistently include necessary 

reporting requirements.

It is too early to determine how well CMS’s planned standard operating 

procedures and management information system will address the 

inconsistencies in its demonstration monitoring process. CMS officials did 

not have any written documentation regarding the agency’s plans as of 

December 2016. As such, it was unclear, for example, whether the 

procedures and new system would include mechanisms to ensure that 

STCs consistently require states to report the information needed for 

CMS to assess compliance with the spending limits. In addition, it was 

unclear if the procedures or new system would ensure that agency staff 
Page 18 GAO-17-312 Medicaid Demonstration Spending Oversight

regularly check that expenditure reporting complies with reporting 

requirements. CMS officials said they intend for the procedures and new 

system to include mechanisms to ensure consistency in those areas. 

Federal internal control standards require that federal agencies design 

control activities to achieve objectives and respond to risks, and that 

agencies implement control activities, including documenting the 

responsibilities for these activities through policies and procedures.34

Without standard procedures for monitoring demonstration spending and 

documenting those efforts, CMS faces the risk of continued 

inconsistencies in monitoring and the risk that it may not identify cases 

where states may be inappropriately using federal funds or exceeding 

spending limits.

CMS’s policy for applying demonstration spending limits has allowed our 

selected states to accrue unused spending authority under the 

demonstration spending limit (referred to in this report as unspent funds) 

and use it to expand demonstrations to include new costs. According to 

CMS officials, under long-standing policy, if a state spends less than the 

spending limit, the agency allows the state to accrue the difference 

between actual expenditures and the spending limit and carry forward the 

unspent funds into future demonstration periods.35 CMS allowed our 

selected states to use unspent funds to expand the demonstration by, for 

example, financing care for additional eligibility groups or additional 

supplemental payments. For example, according to CMS officials, Indiana 

accrued $600 million in unspent state and federal funds during the first 

demonstration period and was using a portion of that—approximately $2 

million a year—to finance care for a small group of beneficiaries with endstage renal disease in a subsequent period of the demonstration.36 CMS 

allowed New York to use $8 billion in accrued unspent federal funds from 

previous demonstration periods to expand its demonstration by including 

a new supplemental payment pool for incentive payments to Medicaid 

providers, costs that would not have been eligible for federal matching 

 34GAO, Standards for Internal Control in the Federal Government, GAO-14-704G 

(Washington, D.C.: September 2014).

35The policy on accrued unspent funds is part of CMS’s budget neutrality policy, which 

was not formally documented, but has been in place for many years. 

36The demonstration provides individuals with incomes between 150 and 300 percent of 

the federal poverty level—who would otherwise be ineligible for Medicaid—with Medicaid 

coverage to supplement their Medicare coverage for end-stage renal disease. 

CMS Is Implementing 

a Revised Policy for 

Applying Spending 

Limits, but the Extent 

to Which It Will 

Effectively Control 

Costs Is Unclear
Page 19 GAO-17-312 Medicaid Demonstration Spending Oversight

funds outside of the demonstration.37 If a state were to exceed its 

spending limit in a demonstration period, the agency allows it to draw 

upon unspent funds from previous demonstration periods to cover 

demonstration expenses, which, according to CMS officials, is consistent 

with the budget neutrality policy, under which spending limits are enforced 

over the life of the demonstration including any extensions beyond the 

initial 5-year term.

The flexibility afforded to states in their accrual and use of unspent funds 

may explain, in part, why CMS has infrequently found that states exceed 

spending limits. Agency officials told us the agency has only withheld 

federal funds once as a result of a state exceeding its spending limit.38

Specifically, in 2007, CMS found that Wisconsin exceeded its 

demonstration spending limit and required the state to return $10.2 million

to the federal government.

Among our selected states, we found that states could accrue significant 

amounts of unspent funds. For example, CMS officials estimated that 

New York and California accrued billions of dollars in unspent funds. 

Based on our analysis, we found that Tennessee accrued approximately 

$11.6 billion in unspent funds over 3 years. (See fig. 4) According to CMS 

officials, growth in health care costs has proven lower than the agency 

and states assumed when setting the spending limits, resulting in 

spending that consistently falls below spending limits across 

demonstrations. In past work, we found that HHS had approved spending 

limits that were higher than the budget neutrality policy suggested. 

Among other concerns, we reported that HHS allows methods for 

establishing the spending limit that may be inappropriate—including 

application of inappropriately high growth rates—and may result in 

excessively high spending limits. For example, we found four 

demonstrations where the spending limits were a total of $32 billion 

 37Given New York’s challenges in reporting expenditures, CMS has not been able to 

determine a specific dollar amount of accrued unspent funds, but CMS officials told us 

they estimated them to be in the tens of billions of dollars, and thus, approving an $8 

billion pool was not likely to exceed the spending limit. 

38CMS allowed 12 states to request an increase of their spending limits without going 

through the formal amendment process when costs proved higher than the state 

projected. Specifically, states with demonstrations that affected services for individuals 

newly eligible for Medicaid under PPACA were granted this flexibility because they lacked 

the data necessary for developing their cost projections. As of December 2016, CMS has 

approved increased spending limits for two states, Arkansas and Michigan. 
Page 20 GAO-17-312 Medicaid Demonstration Spending Oversight

higher than they should have been for the demonstration periods, 

typically 5 years.39

Figure 4: Comparison of Tennessee’s Actual Expenditures to Spending Limit, 

Demonstration Years 11-13

Note: This demonstration was initially approved in 2002. Demonstration years 11 through 13 cover 

July 1, 2012, through June 30, 2015. Unspent funds refer to unused spending authority under the 

demonstration.

In May 2016, CMS communicated to states that the budget neutrality 

policy had been revised to, among other things, restrict the accrual of 

 39As a result of these findings as well as findings from 2008, GAO made 

recommendations to CMS to improve the budget neutrality policy and reexamine spending 

limits. Specifically, we recommended that CMS reconsider its approved spending limits for 

demonstrations in various states including Arizona, Florida, and Texas. CMS disagreed 

with our recommendations. See GAO, Medicaid Demonstration Waivers: Recent HHS 

Approvals Continue to Raise Cost and Oversight Concerns, GAO-08-87 (Washington, 

D.C.: Jan. 31, 2008); and Medicaid Demonstration Waivers: Approval Process Raises 

Cost Concerns and Lacks Transparency, GAO-13-384 (Washington, D.C.: June 25, 

2013). 
Page 21 GAO-17-312 Medicaid Demonstration Spending Oversight

unspent funds to better control demonstration costs.40 Specifically, for 

demonstrations renewed starting in January 2016, CMS restricts the 

amount of unspent funds states can accrue over time in two ways. First, 

when states apply to renew their demonstrations, they can only carry over 

unspent funds from the past 5 years of the demonstration. Second, for 

demonstrations renewed through 2021, CMS limits the amount of unspent 

funds states can accrue each year in the renewal period. Specifically, 

after a state’s initial 5-year demonstration period, the amount of expected 

unspent funds that a state can accrue is reduced by 10 percent per year, 

until states can only accrue 25 percent of expected unspent funds under 

the spending limit.41 For example, a state renewing its demonstration after 

completing its first 5-year demonstration period would be able to keep 90 

percent of the unspent funds it would accrue under the spending limit in 

the sixth year of the demonstration—which is the first year of the renewal 

period—80 percent in the seventh year, and so on. States that had 

renewed previously would experience further restrictions until the 13th 

year of the demonstration, at which point a state would be limited to 

accruing 25 percent a year.

For demonstration renewals starting in 2021, states will still be limited to 

carrying over 5 years of unspent funds, but the percentage restrictions will 

be replaced with different requirements that could lower spending limits. 

Specifically, CMS will require states to submit new cost estimates using 

recent cost data (i.e., to rebase their cost projections). Those new cost 

projections, subject to adjustment, would become the basis of spending 

limits for the renewal period. To the extent that using more recent cost 

data results in spending limits that more closely reflect actual costs—

which have proven lower than assumed by states and CMS when setting 

the spending limit—this requirement may lower spending limits and 

accordingly may reduce the unspent funds that states accrue under those 

limits.

 40CMS’s revised policy also includes additional provisions that are not related to accrued 

unspent funds under the spending limit.

41CMS will reduce expected unspent funds for demonstrations starting in their sixth year 

but only for on-going activities. For example, if a state expands its demonstration to cover 

an additional eligibility group, any unspent funds for that group will not be reduced during 

the first 5 years of coverage for that group. When determining whether an activity is new 

or ongoing, CMS will also consider whether a program activity was in place under another 

Medicaid authority prior to being incorporated in the demonstration.
Page 22 GAO-17-312 Medicaid Demonstration Spending Oversight

As of mid-December 2016, CMS was in the early stages of implementing 

the restrictions, having approved six demonstration renewals under the 

revised policy—those for Arizona, California, Massachusetts, New York, 

Tennessee, and Vermont.42 The updated STCs for the new 

demonstration periods in each state limited the states’ access to unspent 

funds to the last 5 years and reduced the amount of unspent funds the 

states can accrue over the next 5 years. For example, under the revised 

policy, California’s expected accrued unspent funds over its next 

demonstration period will be reduced by approximately $15 billion.43 (See 

fig. 5.)

 42In comments on a draft copy of this report, CMS noted that the agency also applied the 

new restrictions in renewing demonstrations in Indiana and Maryland. From our review of 

the related STCs, it was unclear how the restrictions were applied for those two 

demonstrations. 

43CMS expects that California will accrue a total of $10.8 billion over the next 

demonstration period (which runs from 2016 through 2020) as compared to the $25.5 

billion the state would have accrued in unspent funds under the previous policy. Similarly, 

Arizona will likely accrue fewer unspent funds in its next demonstration period. The state 

is limited to 25 percent of its expected unspent funds. However, we previously reported 

that the spending limit set for Arizona’s demonstration for the period of 2011 through 2016 

was about $26 billion higher than it should have been, in part because it was not based on 

recent spending data. See GAO-13-384. Therefore, it is likely that the state will still accrue 

billions of dollars in unspent funds during the new demonstration period and will carry over 

billions in accrued unspent funds from the past period. 
Page 23 GAO-17-312 Medicaid Demonstration Spending Oversight

Figure 5: Expected Actual Expenditures and Accrued Unspent Funds for California, 

Demonstration Period 2016-2020

Note: Numbers may not total due to rounding. Unspent funds refer to unused spending authority

under the demonstration.

The effectiveness of the revised policy in controlling costs will depend, in 

part, on whether CMS consistently implements the revisions. We found 

two weaknesses that could lead to inconsistent application.

• Lack of formal guidance. CMS released a slide presentation on the 

revised policy during a teleconference with all states but has not 

issued formal guidance. CMS made the slides available on the 

agency’s website, but they were not included in the database of 

guidance—typically letters—for state Medicaid directors. CMS officials 

told us that there was no plan to issue additional guidance to states.44

Although the slides detail how unspent funds will be reduced, without 

formal guidance, it is unclear whether CMS will consistently apply 

these new requirements during demonstration renewals.

• Inconsistent tracking of unspent funds. We found that CMS was 

not consistently tracking unspent funds under the spending limits in 

our selected states, which makes it difficult for CMS to ensure the 

 44CMS officials told us that they communicated this policy change through a slideshow 

presentation provided during a May 2016 call with states to allow the agency to move 

quickly in implementing the policy. 
Page 24 GAO-17-312 Medicaid Demonstration Spending Oversight

unspent funds are reduced by the amount specified under the new 

policy. For example, New York had not provided the financial 

reporting CMS needed to calculate the state’s actual costs for the 

different eligibility groups covered by the demonstration or its accrued 

unspent funds, even though there were specific spending limits for 

these different groups. As a result, CMS could not track unspent funds 

in the state. CMS officials told us the agency required New York to 

produce that information as part of the application for renewing the 

state’s demonstration.45 Similarly, the agency did not have actual 

costs for California’s demonstration, given California’s lack of 

reporting as specified under the STCs, and required the state to 

provide that information under its renewed demonstration.46 CMS 

officials told us the standard operating procedures, as noted above, 

that the agency is developing for monitoring demonstrations will 

reflect the revisions to CMS’s budget neutrality policy. It is too soon to 

determine if these procedures will ensure consistent tracking of 

unspent funds because, as we noted earlier, there was no 

documentation of the agency’s plans for these procedures as of 

December 2016.

Federal internal control standards require that federal agencies should 

design control activities to achieve objectives.47 Control activities like 

formal guidance and standard procedures that clarify the application of 

agency policies help ensure that those policies—such as the revised 

budget neutrality policy—are consistently carried out in achieving cost 

control objectives. Without addressing potential weaknesses, including 

the lack of formal guidance and the lack of consistent tracking of unspent 

funds across all demonstrations, CMS may not be able to effectively 

implement the policy and achieve its related cost-control objectives.

Medicaid section 1115 demonstrations are an important tool for states to 

test new approaches to delivering care that, among other things, may be 

more cost effective. However, the growing federal expenditures for 

 45In addition, according to CMS officials, the agency also required New York to develop a 

plan to correct reporting problems, including completing a budget neutrality specifications 

manual to provide guidance to the state on how to pull the data needed to report on 

budget neutrality. 

46CMS officials told us that California may not carry forward any accrued unspent funds 

from the last 5 years until the state provides CMS with a certified and audited final 

assessment of budget neutrality, including actual expenditures, for that period.

47GAO-14-704G.

Conclusions
Page 25 GAO-17-312 Medicaid Demonstration Spending Oversight

demonstrations—now at over $100 billion a year—for costs that, in some 

cases, would not otherwise be eligible for Medicaid funding makes 

monitoring of those dollars critical. While our work found that CMS was 

monitoring demonstration spending in our selected states, the agency’s 

process also raised concerns. CMS’s lack of standard procedures for its 

monitoring process has contributed to insufficient reporting requirements 

for states and inconsistent enforcement of those requirements. 

Insufficient reporting can create a barrier to monitoring efforts, including 

assessing compliance with spending limits. Inconsistent enforcement 

might allow compliance issues to go undetected for extended periods of 

time, which, as demonstrated by the issues in California and New York, 

can take years to resolve.

A key principle for demonstrations has long been the policy that they must 

be budget neutral to the federal government. Whether demonstrations 

adhere to that principle depends both on how CMS approves and applies 

spending limits during the demonstration. We have raised concerns in the 

past about demonstration approvals, including that in some cases 

spending limits for demonstrations were set too high. Our current work 

found that as a result of high spending limits, states are accruing 

significant amounts of unspent funds under the spending limits and using 

those funds to finance expansions of the demonstration. CMS’s move 

under the revised budget neutrality policy to begin restricting the amount 

of unspent funds that states can accrue is a positive step toward the 

agency’s goal of better controlling demonstration costs. However, states 

may continue to accrue significant amounts of unspent funds. Without 

standard procedures for tracking these funds, CMS will not be able to 

effectively enforce the limits on those funds. Further, without formal 

guidance on the revised policy, it is unclear whether CMS will consistently 

apply the policy.

To improve consistency in CMS oversight of federal spending under 

section 1115 demonstrations, we recommend that the Secretary of Health 

and Human Services require the Administrator of CMS to take the 

following two actions:

1. Develop and document standard operating procedures for monitoring 

spending under demonstrations that

a. Require setting reporting requirements for states that provide

CMS the data elements needed for CMS to assess compliance 

with demonstration spending limits;

Recommendations for 

Executive Action
Page 26 GAO-17-312 Medicaid Demonstration Spending Oversight

b. Require consistent enforcement of states’ compliance with 

financial reporting requirements; and

c. Require consistent tracking of the amount of unspent funds under 

demonstration spending limits.

2. Issue formal guidance on the revised budget neutrality policy, 

including information on how the policy will be applied.

We provided a draft of this report to HHS for review and comment. HHS 

concurred with our first recommendation that the agency should develop 

and document standard operating procedures for monitoring 

demonstration spending. In its response to this recommendation, HHS 

added that the department is developing infrastructure and procedures to 

better support demonstration monitoring. HHS did not explicitly agree or 

disagree with the second recommendation that the agency should issue 

formal guidance on the revised budget neutrality policy and how it will be 

applied. In its response to this recommendation, HHS noted that the new 

policy is being incorporated into new budget neutrality workbook 

templates and monitoring procedures, which will be used by the states 

and reviewers. The agency stated that it will determine if additional

guidance is needed as implementation continues. Given the importance 

of this policy in controlling demonstration costs, we believe that 

developing formal guidance is necessary to ensure consistent application.

HHS also provided technical comments, which we incorporated as 

appropriate. HHS’s comments are reprinted in appendix II.

As agreed with your offices, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days from the 

report date. At that time, we will send copies of this report to the 

Secretary of Health and Human Services, appropriate congressional 

committees, and other interested parties. The report is also available at 

no charge on the GAO website at http://www.gao.gov.

If you or your staff members have any questions about this report, please 

contact me at (202) 512-7114 or iritanik@gao.gov. Contact points for our 

Offices of Congressional Relations and Public Affairs may be found on 

the last page of this report. GAO staff who made key contributions to this 

report are listed in appendix II.

Agency Comments 

and Our Evaluation
Page 27 GAO-17-312 Medicaid Demonstration Spending Oversight

Sincerely yours,

Katherine M. Iritani

Director, Health Care
Appendix I: Federal Spending for Medicaid 

Section 1115 Demonstrations, by State, 

Federal Fiscal Years 2005 and 2015

Page 28 GAO-17-312 Medicaid Demonstration Spending Oversight

2005 2015

State Total 

Medicaid 

expenditures 

(millions)

Expenditures for 

demonstrations 

(millions)

Percent of

Medicaid 

spending for 

demonstrations

Total Medicaid 

expenditures 

(millions)

Expenditures for 

demonstrations 

(millions)

Percent of

Medicaid 

spending for 

demonstrations

Alabama 3,277.5 22.1 0.7 3,663.3 28.5 0.8

Alaska 765.7 0.0 0.0 825.7 0.0 0.0

Arizona 4,759.9 3,438.9 72.2 7,896.9 7,874.7 99.7

Arkansas 2,530.0 46.5 1.8 4,301.9 1,460.1 33.9

California 20,455.7 531.4 2.6 53,209.2 29,272.4 55.0

Colorado 1,686.9 117.8 7.0 4,420.0 0.2 0.0

Connecticut 2,427.0 0.0 0.0 4,211.2 0.0 0.0

Delaware 527.9 274.2 51.9 1,115.3 986.0 88.4

District of Columbia 1,056.1 7.6 0.7 1,758.7 69.6 4.0

Florida 9,378.8 58.7 0.6 12,877.1 8,109.1 63.0

Georgia 5,295.2 0.0 0.0 6,526.1 3.8 0.1

Hawaii 727.8 284.5 39.1 1,258.5 1,176.1 93.5

Idaho 859.0 0.0 0.0 1,234.3 0.0 0.0

Illinois 6,506.1 1,220.0 18.8 10,182.5 13.4 0.1

Indiana 3,957.3 0.0 0.0 6,365.8 1,581.1 24.8

Iowa 1,821.5 0.0 0.0 2,859.2 110.9 3.9

Kansas 1,444.8 0.0 0.0 1,713.7 1,606.5 93.7

Kentucky 3,569.9 536.7 15.0 7,505.7 0.0 0.0

Louisiana 4,544.5 0.0 0.0 4,923.3 592.4 12.0

Maine 1,752.6 101.5 5.8 1,549.2 31.7 2.0

Maryland 3,103.4 1,658.8 53.5 5,631.7 4,251.3 75.5

Massachusetts 5,747.9 3,100.5 53.9 8,631.8 5,642.8 65.4

Michigan 5,919.3 0.0 0.0 11,538.0 4,081.6 35.4

Minnesota 3,344.8 153.8 4.6 6,275.2 96.3 1.5

Mississippi 3,101.2 5.5 0.2 3,806.7 78.1 2.1

Missouri 4,815.9 32.3 0.7 6,099.3 451.4 7.4

Montana 611.8 52.0 8.5 766.7 49.6 6.5

Nebraska 990.6 0.0 0.0 990.2 0.0 0.0

Nevada 800.4 0.0 0.0 2,341.0 215.5 9.2

New Hampshire 749.2 0.0 0.0 1,011.0 0.0 0.0

Appendix I: Federal Spending for Medicaid 

Section 1115 Demonstrations, by State, 

Federal Fiscal Years 2005 and 2015
Appendix I: Federal Spending for Medicaid 

Section 1115 Demonstrations, by State, 

Federal Fiscal Years 2005 and 2015

Page 29 GAO-17-312 Medicaid Demonstration Spending Oversight

2005 2015

State Total 

Medicaid 

expenditures 

(millions)

Expenditures for 

demonstrations 

(millions)

Percent of

Medicaid 

spending for 

demonstrations

Total Medicaid 

expenditures 

(millions)

Expenditures for 

demonstrations 

(millions)

Percent of

Medicaid 

spending for 

demonstrations

New jersey 4,514.8 8.3 0.2 8,631.5 7,368.5 85.4

New Mexico 2,135.5 3.5 0.2 3,897.8 3,613.4 92.7

New York 25,774.5 10,287.1 39.9 31,757.3 880.4 2.8

North Carolina 6,793.0 0.0 0.0 8,742.7 1.3 0.0

North Dakota 416.8 0.0 0.0 666.3 0.0 0.0

Ohio 8,321.1 0.0 0.0 14,787.0 0.0 0.0

Oklahoma 2,313.7 935.0 40.4 2,987.2 1,505.1 50.4

Oregon 2,098.6 1,321.6 63.0 6,251.3 4,179.6 66.9

Pennsylvania 10,269.3 0.0 0.0 12,977.9 629.6 4.9

Rhode island 1,114.0 140.2 12.6 1,530.4 991.6 64.8

South Carolina 3,432.8 699.3 20.4 4,082.6 0.0 0.0

South Dakota 502.2 0.0 0.0 452.0 0.0 0.0

Tennessee 5,895.1 2,760.6 46.8 5,916.7 4,867.1 82.3

Texas 12,669.4 0.0 0.0 20,430.3 15,898.4 77.8

Utah 1,167.0 253.0 21.7 1,522.7 131.6 8.6

Vermont 622.9 252.1 40.5 986.7 974.0 98.7

Virginia 2,669.7 1.0 0.0 4,070.1 4.0 0.1

Washington 3,468.1 38.8 1.1 6,817.9 0.7 0.0

West Virginia 1,942.2 0.0 0.0 2,801.3 0.0 0.0

Wisconsin 3,349.1 162.8 4.9 4,644.3 578.3 12.5

Wyoming 285.4 0.0 0.0 285.3 0.0 0.0

National total 206,283.6 28,506.1 13.8 329,728.6 109,406.9 33.2

Source: GAO analysis of Centers for Medicare & Medicaid Services data, as of October 3, 2016. | GAO-17-312

Note: Total Medicaid expenditures reflect federal spending and do not include state spending. We 

included data on medical spending and excluded administrative costs. States have 2 years to report 

spending; therefore, states may have reported expenditures for a given fiscal year even if the state 

did not have an active demonstration that year. The data reflect adjustments to prior years of 

spending, both positive and negative; therefore, the data may overstate or understate spending in the 

given years. Data for New York for fiscal year 2015 likely understates total spending as the state’s 

expenditure reporting for that year was incomplete.
Appendix II: Comments from the Department 

of Health and Human Services

Page 30 GAO-17-312 Medicaid Demonstration Spending Oversight

Appendix II: Comments from the Department 

of Health and Human Services
Appendix II: Comments from the Department 

of Health and Human Services

Page 31 GAO-17-312 Medicaid Demonstration Spending Oversight
Appendix II: Comments from the Department 

of Health and Human Services

Page 32 GAO-17-312 Medicaid Demonstration Spending Oversight
Appendix III: GAO Contact and Staff 

Acknowledgments

Page 33 GAO-17-312 Medicaid Demonstration Spending Oversight

Katherine M. Iritani, (202) 512-7114 or iritanik@gao.gov

In addition to the contact named above, Susan Barnidge (Assistant 

Director), Jasleen Modi (Analyst-in-Charge), Shamonda Braithwaite, 

Elizabeth Miller, and Giao N. Nguyen made key contributions to this 

report. Also contributing were Giselle Hicks, Laurie Pachter, and Emily 

Wilson.

Appendix III: GAO Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments

(100326)
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