MEDICAID

Improving Transparency 

and Accountability of 

Supplemental Payments 

and State Financing 

Methods

Statement of Katherine M. Iritani 

Director, Health Care

Testimony 

Before the Subcommittee on Health, 

Committee on Energy and Commerce, 

House of Representatives

For Release on Delivery 

Expected at 10:15 a.m. ET

Tuesday, November 3, 2015

GAO-16-195T

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-16-195T, a testimony 

before the Subcommittee on Health, 

Committee on Energy and Commerce, House 

of Representatives

November 3, 2015

MEDICAID

Improving Transparency and Accountability of 

Supplemental Payments and State Financing 

Methods 

Why GAO Did This Study

Medicaid is an over $500 billion jointly 

financed program for which the federal 

government matches state Medicaid 

expenditures. Within certain limits, 

states can make supplemental 

payments to providers in addition to 

their regular claims-based payments

and receive federal matching funds. 

These payments have grown in the 

past decade. To finance the nonfederal 

share of Medicaid payments, states 

can use funds from local governments 

and providers, within federal 

parameters. CMS is responsible for 

overseeing state programs and 

ensuring that state payments are 

consistent with Medicaid payment 

principles—including that they are 

economical and efficient, and 

appropriately financed. 

States may have incentives to make 

excessive supplemental payments to

certain providers who finance the 

nonfederal share of the payment. GAO 

has a body of work from 2004 to 2015 

raising concerns with Medicaid 

supplemental payments and financing 

methods. Congress and CMS have 

taken actions to improve accountability 

for these payments, and GAO has 

made further suggestions for Congress 

and CMS.

This statement highlights key issues

and opportunities for improving 

transparency and oversight from 

GAO’s work related to (1) certain 

supplemental payments states make to 

providers, and (2) states’ financing of 

the non-federal share of Medicaid. This 

testimony is based on GAO reports 

from 2004 to 2015 on state Medicaid 

financing and supplemental payments,

and selected updates from CMS on the 

status of prior recommendations.

What GAO Found

GAO has found that complete and reliable data are lacking on the tens of billions 

in Medicaid supplemental payments states often make, hindering transparency 

and oversight. In a November 2012 report, GAO found that Congress and the 

Centers for Medicare & Medicaid Services (CMS) have acted to improve 

transparency and accountability for one type of Medicaid supplemental payment 

known as disproportionate share hospital (DSH) payments, made for 

uncompensated care costs experienced by hospitals serving low-income and 

Medicaid patients. Since 2010, DSH payments are required to be reported to

CMS and are subject to independent audits that assess their appropriateness. 

States also make other supplemental payments—referred to here as non-DSH 

payments—to hospitals and other providers that, for example, serve high-cost 

Medicaid beneficiaries. Gaps in oversight remained for non-DSH supplemental 

payments, which as of 2011 exceeded DSH in amounts paid. For example, GAO 

reported that 39 states made non-DSH supplemental payments to 505 hospitals 

that, along with regular Medicaid payments, exceeded those hospitals’ total costs 

of providing Medicaid care by about $2.7 billion. Medicaid payments are not 

limited to a provider’s costs for services, but GAO concluded in an April 2015 

report that payments that greatly exceed costs raise questions about whether

they are economical and efficient as required by law, and the extent to which 

they are ultimately used for Medicaid services. CMS lacks data on supplemental 

payments made to individual providers. Per federal internal control standards, 

agencies should have reliable information for decision making and reporting, and 

reasonable assurance that agency objectives, such as compliance with laws, are 

being met. In 2012, CMS officials said legislation was needed to implement nonDSH reporting and auditing requirements, and GAO suggested that Congress 

consider requiring CMS to provide guidance on permissible methods for 

calculating non-DSH payments and require state reports and audits.

GAO found in a July 2014 report that states are increasingly relying on providers 

and local governments to finance Medicaid and data needed for oversight are

lacking. About $46 billion or 26 percent of the nonfederal share was financed with 

funds from providers and local governments in 2012—an increase from 21 

percent in 2008. GAO found that states’ financing arrangements can effectively 

shift costs from states to the federal government. In one state, a $220 million 

payment increase for nursing facilities funded by a $115 million tax on nursing 

facilities yielded a net payment increase to the facilities of $105 million. The state 

obtained $110 million in federal matching funds for the payments. GAO found 

that CMS generally does not require or otherwise collect data from states on 

sources of funds to finance Medicaid, nor ensure that the data it does collect are 

accurate and complete. GAO identified, for example, incomplete reporting of 

provider taxes. As a result, CMS cannot fully assess the appropriateness of 

states’ financing or the extent to which the increased reliance on providers and 

local governments serves to provide fiscal relief to states or improve access. Per

federal internal control standards, agencies should collect accurate and complete 

data for monitoring. GAO recommended in 2014 that CMS improve the data 

states report on Medicaid financing. The agency disagreed, stating its efforts 

were adequate. GAO maintains its recommendation is valid.

View GAO-16-195T. For more information, 

contact Katherine M. Iritani at (202) 512-7114

or iritanik@gao.gov.
Letter

Page 1 GAO-16-195T 

Chairman Pitts, Ranking Member Green, and Members of the 

Subcommittee:

I am pleased to be here today as you discuss legislative proposals related 

to Medicaid financing and certain payments states often make, known as 

supplemental payments. The size, growth, and diversity of Medicaid 

create significant challenges for administration and oversight. Medicaid is 

the nation’s largest health program as measured by enrollment and the 

second largest health program, after Medicare, as measured by 

expenditures. Medicaid is administered by states, overseen by the 

Centers for Medicare & Medicaid Services (CMS), and financed jointly by 

the federal government and states based on a statutory formula. It is a 

significant component of federal and state budgets, with estimated 

outlays of $529 billion in fiscal year 2015, of which $320 billion was 

expected to be financed by the federal government and $209 billion by 

the states.1 By 2020, Medicaid expenditures are projected to total $725 

billion, with federal expenditures alone totaling $436 billion.

States generally finance their share of Medicaid—often called the 

nonfederal or state share—by using state general funds appropriated by 

state legislatures. However, states can, within certain federal parameters, 

use other sources of funds to finance Medicaid, such as taxes on health 

care providers and funds from local government providers or local 

governments on behalf of providers.2 States’ financing of the nonfederal 

share is subject to federal limits and requirements. For example, states 

must use state funds to finance at least 40 percent of the nonfederal 

share of total Medicaid expenditures each year. This limit is applied in the 

aggregate; that is, across each state’s entire Medicaid program, and not 

for individual payments. In addition to flexibility in determining sources of 

funds to use to finance their nonfederal share, states have flexibility, 

within broad federal requirements, in designing and operating their 

Medicaid programs, including setting payment rates for providers. Many 

states make supplemental payments—payments above regular claimsbased payments for Medicaid services—to certain providers, mainly 

 1

Centers for Medicare & Medicaid Services, Office of the Actuary, 2014 Actuarial Report 

on the Financial Outlook for Medicaid (Washington, D.C.: 2015).

2

For purposes of this statement, sources of funds are the means (e.g., taxes) by which 

funds are supplied by entities (e.g., providers) to the state to be used to finance the 

nonfederal share of Medicaid; we do not use the term sources to refer to the entities 

themselves.

Letter
Page 2 GAO-16-195T 

hospitals. The federal government shares in the costs of these payments.

Supplemental payments are a significant component of Medicaid 

spending, totaling at least $43 billion in fiscal year 2011, up from $32 

billion in fiscal year 2010 and at least $23 billion in fiscal year 2006.

These amounts were likely understated because reporting of 

supplemental payments was incomplete.3

As the agency overseeing Medicaid at the federal level, CMS is 

responsible for providing guidance to states on federal Medicaid 

requirements and for overseeing state programs, including ensuring that 

state Medicaid payments are appropriately financed and consistent with 

Medicaid payment principles. For example, Medicaid payments generally 

must be for Medicaid covered items and services, and consistent with 

efficiency, economy, and quality of care.

We have reported over many years on a number of challenges facing 

Medicaid and have a significant body of work on states’ supplemental 

payments to providers and financing of the non-federal share. Both 

Congress and CMS have taken significant steps to improve transparency 

and accountability in these areas. We believe there are opportunities for 

additional improvements that are important in view of both the significant 

spending for supplemental payments and the integrity of the program. My 

testimony today will cover our work related to the supplemental payments 

states often make to certain institutional providers, and to states’

financing of the nonfederal share of the Medicaid program. My remarks 

focus on key issues related to:

1. certain supplemental payments states make to providers, and 

opportunities for improved oversight and transparency, and

2. states’ financing of the non-federal share of Medicaid, and 

opportunities for improved oversight and transparency.

My remarks are based on multiple reports and testimonies we have 

produced on these topics since 2004, including our recent report on key 

issues facing the Medicaid program; our reports on opportunities to 

reduce fragmentation, duplication and overlap in federal programs; and 

 3

See GAO, Medicaid: States Reported Billions More in Supplemental Payments in Recent 

Years, GAO-12-694 (Washington, D.C.: July 20, 2012), and Medicaid: More Transparency 

of and Accountability for Supplemental Payments Are Needed, GAO-13-48 (Washington, 

D.C.: Nov. 26, 2012). 
Page 3 GAO-16-195T 

our most recent high-risk update.4 My remarks on supplemental 

payments states make to providers are based in large part on findings 

from our November 2012 report, which examined how information from

newly required reporting facilitated CMS’s oversight of certain types of 

supplemental payments, and the extent to which similar information 

existed to facilitate CMS’s oversight of other types of supplemental 

payments.5 For that report, we reviewed audits and reports, analyzed 

data on supplemental payments, and interviewed CMS officials. My 

remarks on states’ financing of the non-federal share of Medicaid are 

based in large part on findings from our July 2014 report, which examined 

the extent to which states have relied on funds from health care providers 

and local governments to finance the nonfederal share of Medicaid; the 

extent to which states have changed their reliance on health care 

providers and local governments to help finance the nonfederal share of 

Medicaid in recent years and the implications, if any, of these changes; 

and the extent to which CMS collects data to oversee states’ use of 

various sources of funds.6 For that report, we administered a 

questionnaire to all state Medicaid agencies, examined effects of 

financing changes in a nongeneralizable sample of three states selected 

in part based on Medicaid spending and geographic diversity, and 

interviewed CMS officials. The reports cited provide further details on our 

scope and methodology. My remarks also draw on information we 

obtained from CMS between March 2015 and June 2015 about the status 

of our prior recommendations in these areas, as well as current CMS 

efforts related to Medicaid.7

We conducted the work on which this statement is based in accordance 

with generally accepted government auditing standards. Those standards 

 4

See GAO, Medicaid: Key Issues Facing the Program. GAO-15-677 (Washington, D.C.: 

July 30, 2015), 2015 Annual Report: Additional Opportunities to Reduce Fragmentation, 

Overlap, and Duplication and Achieve Other Financial Benefits, GAO-15-404SP

(Washington, D.C.: April 14, 2015), and High-Risk Series: An Update, GAO-15-290

(Washington, D.C.: February 11, 2015). See Related GAO Products at the end of this 

statement for additional reports on these topics.

5

See GAO-13-48. 

6

See GAO, Medicaid Financing: States’ Increased Reliance on Funds from Health Care 

Providers and Local Governments Warrants Improved CMS Data Collection. GAO-14-627

(Washington, D.C.: July 29, 2014). 

7

See appendix I for related GAO recommendations and matters for congressional 

consideration. 
Page 4 GAO-16-195T 

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.

Medicaid is an open-ended entitlement; states are generally obligated to 

pay for covered services provided to eligible individuals, and the federal 

government is obligated to pay its share of a state’s expenditures under a 

federally approved state Medicaid plan. The federal share of each state’s 

Medicaid expenditures is based on a statutory formula known as the 

Federal Medical Assistance Percentage (FMAP).8 Some states design 

their Medicaid programs to have local governments contribute to the 

programs’ costs, for example, through intergovernmental transfers of 

funds from government-owned or -operated providers to the state 

Medicaid program. States may, subject to certain requirements, also 

receive funds to finance Medicaid payments from health care providers, 

for example, through provider taxes—taxes levied on providers such as 

hospitals or nursing facilities. Under federal law, provider taxes must be 

broad-based, must be uniformly imposed, and must not hold providers 

harmless; that is, they must not provide a direct or indirect guarantee that 

providers will receive all or a portion of tax payments back. Taxes that are 

at or below 6 percent of the individual provider’s net patient service 

revenues are considered not to have provided an indirect guarantee that 

providers will receive their tax payments back.

In addition to flexibility in determining sources of funds they use to finance 

their nonfederal share, states have flexibility, within broad federal 

requirements, in designing and operating their Medicaid programs, 

including determining which services to cover and setting payment rates 

for providers. In general, federal law provides for federal matching funds 

for state Medicaid payments for covered services provided to eligible 

beneficiaries up to a ceiling or limit, often called the upper payment limit 

(UPL). The UPL is based on what Medicare would pay for the same 

services. States often make two general types of Medicaid supplemental 

payments:

 8

The FMAP is based on a formula established by law under which the federal share of a 

state’s Medicaid expenditures for services generally may range from 50 to 83 percent. 

States with lower per capita income receive a higher FMAP for services.

Background
Page 5 GAO-16-195T 

• First, under federal Medicaid law, states are required to make 

disproportionate share hospital (DSH) payments to certain hospitals. 

These payments are designed to help offset these hospitals’

uncompensated care costs for serving Medicaid and uninsured lowincome patients. States’ Medicaid payment rates are not required to 

cover the full costs of providing care to Medicaid beneficiaries, and 

many providers also provide care to low-income patients without any 

insurance or ability to pay. Under federal law, DSH payments are 

capped at a facility-specific level and state level.

• Second, many states also make another type of Medicaid 

supplemental payment, referred to here as non-DSH supplemental 

payments, to hospitals and other providers who, for example, serve 

high-cost Medicaid beneficiaries. Unlike DSH payments, non-DSH 

supplemental payments are not required under federal law, do not 

have a specified statutory or regulatory purpose, and are not subject 

to firm dollar limits at the facility or state level. Unlike regular Medicaid 

payments, which are paid on the basis of covered Medicaid services 

provided to Medicaid beneficiaries through an automated claims 

process, non-DSH supplemental payments are not necessarily made 

on the basis of claims for specific services to particular patients and 

can amount to tens or hundreds of millions of dollars to a single 

provider, annually. States can generally make non-DSH payments up 

to the UPL. Typically, state Medicaid payment rates are lower than 

what the Medicare program would pay, and so many states make 

supplemental payments under the UPL. Non-DSH supplemental 

payments, like regular Medicaid payments, must be consistent with 

Medicaid payment principles. Under federal law, to receive federal 

matching funds, payments generally must (1) be made for covered 

Medicaid items and services, (2) be consistent with economy, 

efficiency, and quality of care, and (3) not exceed the UPL.

Supplemental payments may also be made under Medicaid 
Page 6 GAO-16-195T 

demonstrations, but may not be subject to these requirements, 

depending on the terms of the demonstration.9

Historically, DSH payments exceeded Medicaid non-DSH payments. In 

recent years the opposite has occurred, and non-DSH payments have 

exceeded DSH payments. In fiscal year 2011, Medicaid non-DSH 

payments totaled nearly $26 billion compared to over $17 billion for DSH 

payments.

For about two decades, we have raised concerns about supplemental 

payments and the adequacy of federal oversight. We have designated 

Medicaid a high-risk program due in part to these concerns. For example, 

in a February 2004 report, we found that over the years some states had 

made relatively large non-DSH supplemental payments to relatively small 

numbers of government-owned providers, and that these providers were 

then sometimes required to return these payments to the states, resulting 

in an inappropriate increase in federal matching funds. We also found that 

some states had used widely varying and inaccurate methods for 

estimating their non-DSH payment amounts, which may inflate the 

amount of non-DSH supplemental payments.10 CMS is responsible for 

ensuring that state Medicaid payments are consistent with federal 

requirements, including that payments are consistent with economy and 

efficiency and are for Medicaid-covered services. To do so, it is important 

 9

Under section 1115 of the Social Security Act, states may apply to and receive approval 

from CMS for a demonstration that allows states to deviate from their traditional Medicaid 

program. Spending authorities under the demonstrations provide states with the ability to 

claim federal Medicaid funds for new types of expenditures, including the costs of making 

additional payments to providers. These supplemental payments are governed by the 

terms and conditions of the individual demonstrations. Our work prior to 2013 did not 

generally refer to demonstration supplemental payments as non-DSH payments. Our work 

in 2014 and 2015 refers to demonstration supplemental payments as a type of non-DSH 

supplemental payment. CMS, when reporting states’ non-DSH supplemental payment 

expenditures, includes both supplemental payments made under a state Medicaid plan 

and demonstration supplemental payments.

10See GAO, Medicaid: Improved Federal Oversight of State Financing Schemes Is 

Needed, GAO-04-228 (Washington, D.C.: February 13, 2004). In this report, we 

recommended CMS issue guidance on permissible methods for estimating non-DSH 

payment amounts. CMS concurred with our recommendation, and has taken some steps 

to improve oversight of these payments, but has not specified uniform methods for 

calculating non-DSH supplemental payment amounts.

Complete and 

Reliable Data on 

Non-DSH 

Supplemental 

Payments are 

Lacking, Hindering 

Transparency and 

Oversight
Page 7 GAO-16-195T 

for CMS to have relevant, reliable, and timely information for 

management decision making and external reporting purposes.11

In recent years, our work examining these payments has identified 

several instances of payments that further raise concerns about whether 

Medicaid payments that greatly exceeded costs are economical and 

efficient. For example, as reported in November 2012, we found that 39 

states had made non-DSH supplemental payments to 505 hospitals that, 

along with their regular Medicaid payments, exceeded those hospitals’

total costs of providing Medicaid care by $2.7 billion.12 In some cases, 

payments greatly exceeded costs; for example, one hospital received 

almost $320 million in non-DSH payments and $331 million in regular 

Medicaid payments, which exceeded the $410 million in costs reported 

for the hospital for providing Medicaid services by about $241 million.

As we reported in April 2015, our more recent analysis of average daily 

payment amounts—which reflect both regular payments and non-DSH 

supplemental payments—identified hospitals for which Medicaid 

payments received exceeded their Medicaid costs, and we also found a 

few cases where states made payments to local government hospitals 

that exceeded the hospitals’ total operating costs.13 CMS’s oversight 

mechanisms had not identified large overpayments to two hospitals in 

one state that resulted from non-DSH supplemental payments until we 

identified them. CMS began reviewing the appropriateness of the two 

hospitals’ payments during the course of our review. As we concluded in 

our 2012 and 2015 reports, although Medicaid payments are not required 

to be limited to a provider’s costs of delivering Medicaid services, 

payments that greatly exceed these costs raise questions, including 

whether they are consistent with economy and efficiency, whether they 

 11According to federal internal control standards, agencies are responsible for determining 

through monitoring that relevant, reliable, and timely information is available for 

management decision making and external reporting purposes. In addition, agencies are 

responsible for continually examining and improving internal controls to provide 

reasonable assurance that the objectives of the agency, such as compliance with 

applicable laws and regulations, are being achieved. See GAO, Standards for Internal 

Control in the Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November 

1999).

12See GAO-13-48.

13See GAO, Medicaid: CMS Oversight of Provider Payments Is Hampered by Limited 

Data and Unclear Policy, GAO-15-322 (Washington, D.C.: April 10, 2015).
Page 8 GAO-16-195T 

contribute to beneficiaries’ access to quality care, and the extent to which 

they are ultimately used for Medicaid purposes. However, CMS lacks 

data at the federal level on non-DSH supplemental payments, and the 

payments are not subject to audit.14

Based on our findings, we have identified opportunities to improve the 

oversight, transparency, and accountability of non-DSH supplemental 

payments to providers, in particular through improved reporting, auditing,

and guidance. Since 2010, states have been required by federal law to 

submit annual facility-specific reports and annual independent certified 

audits on DSH payments.15 In connection with the independent audit 

requirement, standard methods were established for calculating DSH 

payment amounts.16 However, similar requirements for reporting, annual 

independent audits, and guidance on acceptable methods for calculating 

non-DSH supplemental payments are not in place for non-DSH 

payments. As we reported in November 2012, we found that the newly 

implemented annual reporting and audits for DSH payments improved 

CMS oversight—and we concluded that better reporting and audits of 

non-DSH supplemental payments could improve CMS’s oversight of 

these payments as well.

As our work has shown, states’ non-DSH supplemental payments can be 

complex and challenging to assess. Hospital-specific information can be 

helpful to CMS and others for understanding, at the provider level, the 

relationship of supplemental payments to both regular Medicaid payments 

and Medicaid costs. For example, reporting of non-DSH payments that 

states make to individual hospitals and other providers relative to the 

providers’ Medicaid costs could improve the transparency of these 

payments. In addition, audits could improve accountability by providing 

information on how these payments are calculated and the extent to 

which payments to individual providers are consistent with the Medicaid 

payment principles of economy and efficiency.17 Absent complete and 

 14See GAO-15-322 and GAO-13-48.

15These requirements were mandated by statute. In 2008, CMS issued a final rule to 

implement the 2003 DSH audit and report requirements. The first sets of DSH audits and 

reports, covering payments made in 2005 through 2007, were submitted to CMS in 

December 2010. See GAO-13-48. 

16See GAO-12-694 and GAO-13-48. 

17See GAO-13-48.
Page 9 GAO-16-195T 

reliable provider-specific data on the non-DSH supplemental payments 

individual providers receive, CMS may not identify potentially excessive 

payments to providers, and the federal government could be paying 

states hundreds of millions—or billions—of dollars more than what is 

appropriate.18

CMS has taken some steps to improve oversight of these payments, but 

has not established facility-specific reporting requirements, required 

annual independent audits of states’ non-DSH payments, or specified 

uniform methods for calculating non-DSH supplemental payment 

amounts. Steps CMS has taken include issuing a state Medicaid Director 

letter in 2013 to obtain more information on non-DSH supplemental 

payments and awarding a contract in May 2014 to review Medicaid 

supplemental payment information, the outcomes of which were not yet 

known as of July 2015.19 CMS said in 2012 that legislation was necessary 

for them to implement reporting and auditing requirements for DSH 

payments, and that legislation would be needed for the agency to 

implement similar requirements for non-DSH supplemental payments. 

Consequently, we have suggested that Congress consider requiring CMS 

to take steps to improve the transparency and accountability of non-DSH 

supplemental payments, including requirements similar to those in place 

for DSH.

 18As we reported in April 2015, we found that CMS oversight of provider supplemental 

payments is limited because the agency does not require states to report provider-specific 

data on these payments, nor does it have a policy and standard process for determining 

whether Medicaid payments to individual providers are economical and efficient. We 

recommended that CMS improve its oversight by taking steps to ensure that states report 

accurate, provider-specific payment data, and by developing a policy and process for 

reviewing payments to individual providers to determine whether they are economical and 

efficient, and HHS concurred with our recommendations. 

19The contract will develop options for improving oversight of payments to support CMS’s 

Medicaid program integrity and oversight efforts. As of July 2015, the contract study was 

ongoing. According to CMS officials, CMS plans to develop an appropriate action plan as 

necessary when the results of the contract study are available. 
Page 10 GAO-16-195T 

Our work has found that states are increasingly relying on providers and 

local governments to finance Medicaid, and has also pointed to the need 

for better data and improved oversight to ensure that Medicaid payments 

are financed consistent with federal requirements, to understand 

financing trends, and to ensure federal matching funds are used 

efficiently. Further, our work has shown that state flexibility to seek 

contributions from local governments or impose taxes on health care 

providers to finance Medicaid may create incentives for states to overpay 

providers in order to reduce states’ financial obligations. Such financing 

arrangements can have the effect of shifting costs of Medicaid from states 

to the federal government. Benefits to providers, which may be financing 

a large share of any new payments, and to the beneficiaries whom they 

may serve, may be less apparent. CMS is responsible for ensuring that 

state Medicaid payments made under financing arrangements are 

consistent with Medicaid payment principles, including that they are 

economical and efficient, and that the federal government and states 

share in the financing of the Medicaid program as established by law. To 

oversee the Medicaid program, it is important for CMS to have accurate 

and complete information on the amount of funds supplied by health care 

providers and local governments to states to finance the nonfederal share 

of Medicaid.20

As we reported in July 2014, our survey of all state Medicaid programs 

found that states are increasingly relying on providers and local 

governments to help fund Medicaid. For example, in state fiscal year 

2012, funds from providers and local governments accounted for 26 

percent (or over $46 billion) of the approximately $180 billion in the total 

nonfederal share of Medicaid payments that year—an increase from 21 

percent ($31 billion) in state fiscal year 2008.21 (See fig. 1.) These 

sources were used to fund Medicaid supplemental payments—both DSH 

and non-DSH—to a greater extent than other types of payments, and we 

found this reliance was growing. For Medicaid DSH and non-DSH 

 20According to federal internal control standards, federal agencies should collect accurate 

and complete data to monitor programs they oversee. See GAO/AIMD-00-21.3.1.

21We found that the percentage and amount of funds from health care providers and local 

governments that states used to finance the nonfederal share of Medicaid payments 

varied significantly among states in state fiscal year 2012. For example, in the 48 states 

that reported using funds from health care providers and local governments, the 

percentage of funds from providers and local governments ranged from less than 1 

percent in South Dakota and Virginia to 53 percent in Missouri. See GAO-14-627.

States are 

Increasingly Relying 

on Providers and 

Local Governments to 

Finance Medicaid,

and Data Needed for 

Oversight is Lacking
Page 11 GAO-16-195T 

supplemental payments, the percentage of the nonfederal share financed 

with funds from providers and local governments increased from 57 

percent (or $8.1 billion) in state fiscal year 2008 to 70 percent (or $13.6 

billion) in state fiscal year 2012. Several states relied on health care 

providers and local governments for the entire nonfederal share of 

supplemental payments in 2012.

Figure 1: Amount of the Nonfederal Share of Medicaid Payments from Health Care Providers and Local Governments, State 

Fiscal Years 2008 through 2012

a

For this graphic, we use the term provider tax to refer to health care provider taxes, fees, or 

assessments. The amounts of provider taxes reported include provider donations. Provider donations 

totaled $17 million in 2008, $16 million in 2009, $78 million in 2010, $69 million in 2011, and $72 

million in 2012.
Page 12 GAO-16-195T 

Our reports have illustrated how this increased reliance on non-state 

sources of funds can shift costs from states to the federal government, 

changing the nature of the federal-state partnership. For example, in our 

July 2014 report, our analysis of arrangements involving financing of the 

nonfederal share of Medicaid payments with funds from provider taxes or 

local governments in three selected states illustrated how Medicaid costs 

can be shifted from the state to the federal government and, to a lesser 

extent, to health care providers and local governments.22 The use of 

funds from providers and local governments is, as previously described, 

allowable under federal rules, but it can also have implications for federal 

costs. By increasing providers’ Medicaid payments, and requiring 

providers receiving the payments to supply all or most of the nonfederal 

share, we found that states claimed an increase in federal matching funds 

without a commensurate increase in state general funds. For example, in 

our 2014 report, we found that in one state a $220 million payment 

increase for nursing facilities in 2012 (which was funded by a tax on 

nursing facilities) resulted in an estimated $110 million increase in federal 

matching funds; no increase in state general funds; and a net payment 

increase to the facilities, after paying the taxes, of $105 million. (See fig. 

2.)

 22See GAO-14-627.
Page 13 GAO-16-195T 

Figure 2: Example of How One State’s Use of Non-State Sources to Fund Medicaid 

Payments to Nursing Facilities Shifted Medicaid Costs to the Federal Government 

in State Fiscal Year 2012

Note: This figure illustrates the estimated effect of a new provider tax and increased Medicaid 

payments on the state and federal share of total regular Medicaid payments to nursing facilities and 

on net Medicaid payments to nursing facilities in one state in state fiscal year 2012. For the analysis, 

we compared actual payments in that year to what payments would have been without the provider 

tax and increased Medicaid payments to nursing facilities.

a

The state used state general funds to finance most of the nonfederal share of Medicaid, but we 

estimated that the provider tax resulted in the state needing to use $5 million less in state general 

funds to finance its share of Medicaid.

As we found in our 2014 report, due to data limitations, CMS is not wellpositioned to either identify states’ Medicaid financing sources or assess 

their impact. Apart from data on provider taxes, CMS generally does not 

require (or otherwise collect) information from states on the funds they 

use to finance Medicaid, nor ensure that the data that it does collect are 

accurate and complete.23 The lack of transparency in states’ sources of 

funds and financing arrangements hinders CMS’s and federal 

policymakers’ efforts to oversee Medicaid. Further, it is difficult to 

 23We reported in July 2014, for example, that when we compared the provider tax data 

reported to CMS in 2012 with state responses to our questionnaire, we found evidence of 

incomplete reporting. Specifically, 6 of the 47 states that reported in the questionnaire that 

they had at least one health care provider tax or provider donation in effect that year did 

not report a tax or donation to CMS in 2012.
Page 14 GAO-16-195T 

determine whether a state’s increased reliance on funds from providers 

and local governments primarily serves to (1) provide fiscal relief to the 

state by increasing federal funding, or (2) increase payments to providers 

that in turn help improve beneficiary access.

CMS has recognized the need for better data from states on how they 

finance their share of Medicaid and has taken steps to collect some data, 

but additional steps are needed. We recommended in July 2014 that 

CMS take steps to ensure that states report accurate and complete 

information on all sources of funds used to finance the nonfederal share 

of Medicaid, and offered suggestions for doing so. The Department of 

Health and Human Services (HHS) did not concur with our 

recommendation, stating that its current efforts were adequate; however, 

HHS acknowledged that additional data were needed to ensure that 

states comply with federal requirements regarding how much local 

governments may contribute to the nonfederal share, and stated that it 

would examine efforts to improve data collection for oversight.24 As of 

June 2015, HHS reported that its position continued to be that no further 

action is needed. Given states’ increased reliance on non-state sources 

to fund the nonfederal share of Medicaid, which can result in costs 

shifting to the federal government, we continue to believe that improved 

data are needed to improve transparency and oversight, such as to 

understand how increased federal costs may affect beneficiaries and the 

providers who serve them.

In conclusion, the flexibility states have in how they pay providers and 

finance the nonfederal share has enabled states to make excessive 

payments to certain providers and allowed states to shift costs to the 

federal government. While Congress and CMS have taken important 

 24In commenting on a draft of our July 2014 report, HHS acknowledged that it does not 

have adequate data on state financing methods for overseeing compliance with a certain 

federal requirement related to the nonfederal share—the 60 percent limit on contributions 

from local governments to finance the nonfederal share—and stated that it will examine 

efforts to improve data collection toward this end. HHS also stated that it is working to 

identify needs for improvement in current payment and financing review processes. 

However, HHS did not concur with two options we suggested in our recommendation for 

short- and long-term ways of improving agency data collection. Specifically, HHS 

disagreed with suggestions that facility-specific data are needed for oversight, and that an 

enhanced Medicaid claims data system the agency is developing—called the Transformed 

Medicaid Statistical Information System (T-MSIS)—may be an appropriate means for 

collecting financing data. HHS stated that it believed that its current financing reviews are 

sufficiently reviewing provider-level data. See GAO-14-627.
Page 15 GAO-16-195T 

steps to improve the integrity of the Medicaid program through improved 

oversight of some Medicaid supplemental payments and financing 

arrangements, Congress and CMS need better information and more 

tools to understand who receives non-DSH supplemental payments and 

in what amounts, to ensure they are economical and efficient as required 

by law, and to determine the extent to which they are ultimately used for 

Medicaid purposes.

Chairman Pitts, Ranking Member Green, and Members of the 

Subcommittee, this concludes my prepared statement. I would be 

pleased to respond to any questions that you might have at this time.

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

contact Katherine M. Iritani at (202) 512-7114. Contact points for our 

Offices of Congressional Relations and Public Affairs may be found on 

the last page of this statement. Individuals making key contributions to 

this testimony include Tim Bushfield, Assistant Director; Robin Burke; 

Sandra George; Jessica Morris; Laurie Pachter; Said Sariolghalam; and 

Emily Wilson.

GAO Contacts and 

Staff 

Acknowledgments
Appendix I: GAO’s Matters for Congressional 

Consideration and Agency Recommendations

Page 16 GAO-16-195T 

The following table lists matters for congressional consideration regarding 

actions to improve the transparency of and accountability for the Medicaid 

non-disproportionate share hospital (DSH) supplemental payments states 

make to providers. It also includes recommendations we have made to 

the Department of Health and Human Services (HHS) regarding actions 

to improve data and oversight of the sources of funds states use to 

finance the nonfederal share of Medicaid.

Table 1: GAO’s Related Matters for Congressional Consideration, Agency Recommendations, and Status

GAO Report

Matters for Congressional Consideration and Agency 

Recommendations Status

Medicaid: More 

Transparency of and 

Accountability for 

Supplemental Payments 

Are Needed. GAO-13-48, 

November 26, 2012

Congress should consider requiring the Centers for 

Medicare & Medicaid Services (CMS) to

1. improve state reporting of non-disproportionate share 

hospital (DSH) supplemental payments, including 

requiring annual reporting of payments made to 

individual facilities and other information that the 

agency determines is necessary to oversee non-DSH 

supplemental payments;

2. clarify permissible methods for calculating non-DSH 

supplemental payments; and

3. require states to submit an annual independent 

certified audit verifying state compliance with

permissible methods for calculating non-DSH 

supplemental payments.

As of October 2015, Congress had not 

implemented this matter for its 

consideration.

Medicaid Financing: States’

Increased Reliance on 

Funds from Health Care 

Providers and Local 

Governments Warrants 

Improved CMS Data 

Collection. GAO-14-627, 

July 29, 2014

CMS should develop a data collection strategy that 

ensures that states report accurate and complete data on 

all sources of funds used to finance the nonfederal share 

of Medicaid payments. There are short- and long-term 

possibilities for pursuing the data collection strategy, 

including

1. in the short-term, as part of its ongoing initiative to 

annually collect data on Medicaid payments made to 

hospitals, nursing facilities, and other institutional 

providers, CMS could collect accurate and complete 

facility-specific data on the sources of funds used to 

finance the nonfederal share of the Medicaid 

payments, and

2. in the long-term, as part of its ongoing initiative to 

develop an enhanced Medicaid claims data system 

(T-MSIS), CMS could ensure that T-MSIS will be 

capable of capturing information on all sources of 

funds used to finance the nonfederal share of 

Medicaid payments, and, once the system becomes 

operational, ensure that states report this information 

for supplemental Medicaid payments and other highrisk Medicaid payments 

In commenting on a draft of our report, the 

Department of Health and Human Services 

(HHS) did not concur with our 

recommendation, stating that its current 

efforts were adequate. However, HHS 

acknowledged that additional data were 

needed to ensure that states comply with 

federal requirements regarding how much 

local governments may contribute to the 

nonfederal share, and stated that it would 

examine efforts to improve data collection 

for oversight. As of June 2015, HHS 

reported that no further action was needed.

Source: GAO. | GAO-16-195T

Appendix I: GAO’s Matters for Congressional 

Consideration and Agency 

Recommendations
Related GAO Products

Page 17 GAO-16-195T 

Medicaid: Key Issues Facing the Program. GAO-15-677. Washington, 

D.C.: July 30, 2015.

2015 Annual Report: Additional Opportunities to Reduce Fragmentation, 

Overlap, and Duplication and Achieve Other Financial Benefits.

GAO-15-404SP. Washington, D.C.: April 14, 2015.

Medicaid: CMS Oversight of Provider Payments Is Hampered by Limited 

Data and Unclear Policy. GAO-15-322. Washington, D.C.: April 10, 2015.

Medicaid Financing: Questionnaire Data on States’ Methods for Financing 

Medicaid Payments from 2008 through 2012. GAO-15-227SP. 

Washington, D.C.: March 13, 2015, an e-supplement to GAO-14-627. 

High-Risk Series: An Update. GAO-15-290. Washington, D.C.: February 

11, 2015.

Medicaid Financing: States’ Increased Reliance on Funds from Health 

Care Providers and Local Governments Warrants Improved CMS Data 

Collection. GAO-14-627. Washington, D.C.: July 29, 2014.

Medicaid: Completed and Preliminary Work Indicate that Transparency 

around State Financing Methods and Payments to Providers Is Still 

Needed for Oversight. GAO-14-817T. Washington, D.C.: July 29, 2014.

2013 Annual Report: Actions Needed to Reduce Fragmentation, Overlap, 

and Duplication and Achieve Other Financial Benefits. GAO-13-279SP. 

Washington, D.C.: April 9, 2013.

Medicaid: More Transparency of and Accountability for Supplemental 

Payments Are Needed. GAO-13-48. Washington, D.C.: November 26, 

2012.

Medicaid: States Reported Billions More in Supplemental Payments in 

Recent Years. GAO-12-694. Washington, D.C.: July 20, 2012.

Medicaid: Ongoing Federal Oversight of Payments to Offset 

Uncompensated Hospital Care Costs is Warranted. GAO-10-69. 

Washington, D.C.: November 20, 2009.

Medicaid: CMS Needs More Information on the Billions of Dollars Spent

on Supplemental Payments. GAO-08-614. Washington, D.C.: May 30, 

2008.

Related GAO Products
Related GAO Products

Page 18 GAO-16-195T 

Medicaid Financing: Federal Oversight Initiative Is Consistent with 

Medicaid Payment Principles but Needs Greater Transparency. 

GAO-07- 214. Washington, D.C.: March 30, 2007. 

Medicaid: Improved Federal Oversight of State Financing Schemes Is 

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

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