United States Government Accountability Office

GAO Report to the Chairman, Committee on 

Finance, U.S. Senate 

MEDICAID 

FINANCIAL 

MANAGEMENT 

Steps Taken to 

Improve Federal 

Oversight but Other 

Actions Needed to 

Sustain Efforts 

June 2006 

 

GAO-06-705 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

June 2006

MEDICAID FINANCIAL MANAGEMENT

Steps Taken to Improve Federal 

Oversight but Other Actions Needed to 

Sustain Efforts 

Highlights of GAO-06-705, a report to the 

Chairman, Committee on Finance, 

U.S. Senate 

Medicaid—the federal-state health

care financing program—covered

over 56 million people at a cost of 

$295 billion in fiscal year 2004, the

latest fiscal year for which complete

data are available. The Centers for 

Medicare & Medicaid Services (CMS) 

is the federal agency responsible for 

overseeing states’ Medicaid programs

and ensuring the propriety of 

expenditures reported by states for 

federal reimbursement. In 2002, GAO 

reported on weaknesses in CMS’s 

oversight of Medicaid financial 

management and made

recommendations to CMS to 

strengthen its oversight process. In 

fiscal year 2003, CMS started 

receiving funds from the Health Care

Fraud and Abuse Control (HCFAC) 

program to help improve Medicaid

financial management. GAO was 

asked to evaluate CMS’s financial 

management activities, including

following up on prior 

recommendations. In this report,

GAO examined (1) the extent to 

which CMS has improved its ability to 

identify and address emerging issues 

that put federal Medicaid dollars at

risk and (2) how CMS used funds for

Medicaid from the HCFAC account. 

What GAO Recommends

GAO is making two 

recommendations to the CMS 

Administrator to create permanent 

funding specialist positions and 

determine what systems projects are 

needed to further enhance data

analysis capabilities. CMS agreed

with our findings and 

recommendations. 

CMS has undertaken several steps to improve its Medicaid financial 

management activities, including its efforts to oversee state claims for 

federal reimbursement and to identify payment errors. CMS hired about 90 

funding specialists, thus enhancing its ability to address high-risk state 

funding practices that inappropriately increase federal costs. CMS also 

created a new unit that centralized responsibility for approving state plan 

amendments related to reimbursement. CMS continued to identify billions of 

dollars in questionable federal reimbursement through focused financial 

reviews. CMS also set goals aimed at reducing questionable federal

reimbursement and holding financial managers accountable and enhanced 

its internal processes for tracking results of its financial management 

activities. These and other efforts, such as CMS’s approach for measuring 

payment errors under the Improper Payments Information Act, represent 

improvements in the processes that CMS uses in its oversight of states. 

While these actions also address previously identified weaknesses and 

recommendations from our 2002 report, it is too soon to assess the impact 

they will have on improving overall financial management and addressing 

emerging issues that put federal Medicaid dollars at risk because some have

just recently been initiated and results are not known yet. Further, there are 

a number of previously identified weaknesses that the agency has not yet 

addressed. Specifically, CMS has not instituted mechanisms to measure how 

the risk of inappropriate federal reimbursement has changed as a result of 

corrective actions taken. In addition, CMS has not incorporated the use of 

the Medicaid Statistical Information System database into its oversight of 

states’ claims or other systems projects intended to improve its analysis

capabilities. Further, CMS has not developed profiles to document 

information on state fraud and abuse controls to use in its oversight of state

claims. Finally, CMS has not developed a strategic plan specific to its 

Medicaid financial management activities. Because these issues are

important to further improving and sustaining CMS’s oversight activities, we 

reiterate and build on our prior recommendations in these areas. 

During fiscal years 2003 through 2005, CMS received almost $46 million from 

the HCFAC account that it used to help fund programs related to its 

oversight of the Medicaid program, including about $12 million for the 

funding specialists for fiscal years 2004 and 2005. The funding specialist 

positions have been funded on an annual basis with appropriations from the 

HCFAC account. There is the chance that adequate funding might not be 

provided through the HCFAC process in any given year for the funding 

specialists; therefore, creating permanent funding specialist positions is 

important. CMS used the other $34 million for other projects such as 

researching options for automating the Medicaid state plan process, and 

interagency agreements with the OIG to conduct audits of high-risk areas. 

GAO obtained documentation to support the use of HCFAC funds for these 

projects. 

www.gao.gov/cgi-bin/getrpt?GAO-06-705. 

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Linda Calbom 

at (202) 512-8341 or calboml@gao.gov. 
Contents 

Letter 1

Results in Brief 3

Background 5

Steps Taken to Improve Oversight Activities but Some Previously 

Identified Weaknesses Remain 8 

Use of HCFAC Funds to Enhance Medicaid Oversight Initiatives 22 

Conclusions 25

Recommendations for Executive Action 26 

Agency Comments and Our Evaluation 26 

Appendix I Scope and Methodology 28 

Appendix II Status of Prior Recommendations 30 

Appendix III Comments from the Centers for Medicare & 

Medicaid Services 34 

Appendix IV GAO Contact and Staff Acknowledgments 39 

Related GAO Products 40 

Tables 

Table 1: Medicaid Spending in Fiscal Years 2003 and 2004 6 

Table 2: Issues Consistently Planned for Focused Financial 

Reviews in Fiscal Years 2003 through 2006 12 

Table 3: Issues To Be Audited by the OIG in Fiscal Years 2003 

through 2005 14 

Table 4: Discretionary HCFAC Funds for CMS and CMSO’s 

Allocation 23

Table 5: Medicaid Financial Management Projects and Their 

HCFAC Allocations for Fiscal Years 2003 through 2005 24 

Page i GAO-06-705 Medicaid Financial Management
Table 6: Recommendations Made in GAO-02-300 – Medicaid 

Financial Management: Better Oversight of State Claims 

for Federal Reimbursement Needed (February 2002) 30 

Figure 

Figure 1: CMS Organizational Chart 7 

Abbreviations 

CMS Centers for Medicare & Medicaid Services 

CMSO Center for Medicaid and State Operations 

DFM Division of Financial Management

DRSF Division of Reimbursement and State Financing 

FMAR Financial Management Activities Report 

GPRA Government Performance and Results Act 

HCFAC Health Care Fraud and Abuse Control 

HHS Department of Health and Human Services 

MSIS Medicaid Statistical Information System 

OIG Office of Inspector General 

PERM Payment Error Rate Measurement 

SCHIP State Children’s Health Insurance Program 

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Page ii GAO-06-705 Medicaid Financial Management
United States Government Accountability Office

Washington, DC 20548 

June 22, 2006 

The Honorable Charles E. Grassley 

Chairman 

Committee on Finance 

United States Senate 

Dear Mr. Chairman: 

Medicaid—the federal-state program financing health care for certain lowincome children, families, and individuals who are aged or disabled—

covered over 56 million people at an estimated cost of $295 billion in fiscal 

year 2004. Within broad federal guidelines, states administer their 

Medicaid programs by paying qualified health providers for a range of 

covered services provided to eligible beneficiaries and then seeking 

reimbursement for the federal share of those payments. The Department 

of Health and Human Services’ (HHS) Centers for Medicare & Medicaid 

Services (CMS) is the federal agency responsible for overseeing states’ 

Medicaid programs and ensuring the propriety of expenditures reported by 

states for federal reimbursement. States can design and administer their 

Medicaid programs in a manner that helps them ensure that they receive 

the maximum allowable federal share of expenditures they incur for 

covered services provided to eligible beneficiaries under a CMS-approved 

state Medicaid plan, as long as they do so within the framework of federal

law, regulation, and CMS policy. 

For more than a decade, we have reported concerns relating to actions by 

some states that result in excessive federal reimbursement. We have also 

reported concerns about CMS’s oversight of states’ claims for 

reimbursement and CMS’s efforts to detect and reduce improper payments

in the Medicaid program.1

 In 2002, we made 13 recommendations to CMS 

to strengthen oversight of states and certain activities to address fraud and 

abuse.2

 In 2003, we added Medicaid to our list of high-risk federal 

 1

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

2

GAO, Medicaid Financial Management: Better Oversight of State Claims for Federal

Reimbursement Needed, GAO-02-300 (Washington, D.C.: Feb. 28, 2002). 

Page 1 GAO-06-705 Medicaid Financial Management
programs3

 because the challenges inherent in overseeing a program of 

Medicaid’s size, growth, and diversity put the program at high risk for 

waste, abuse, and exploitation. 

Congress and CMS have taken actions to (1) curtail certain abusive 

financing schemes that some states have used to generate excessive 

federal reimbursement and (2) strengthen Medicaid fraud and abuse 

control activities. Further, CMS received almost $46 million of Health Care 

Fraud and Abuse Control (HCFAC)4

 funds during fiscal years 2003 through 

2005 for programs related to its oversight of Medicaid, including hiring 

new staff to identify and review state practices related to funding their 

Medicaid programs. 

Because of your continued concern about the stewardship of federal 

Medicaid funds, you raised questions about CMS’s oversight. The focus of

this report is on CMS’s financial management activities, including its 

efforts to oversee state claims for federal reimbursement and to identify 

payment errors. We also focus on how CMS has responded to our 2002 

recommendations to strengthen financial oversight and certain activities 

to address fraud and abuse. Specifically, in this report, we address the 

following questions: 

1. To what extent has CMS improved its oversight, including its ability to 

identify and address emerging issues that put federal Medicaid dollars at 

risk? 

2. How has CMS used funds provided through the HCFAC program that 

were specifically for Medicaid? 

To identify the extent to which CMS has improved its oversight, including 

its ability to identify and address emerging issues that put federal Medicaid 

dollars at risk, we performed work at CMS headquarters and two regional 

 3

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

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

4

 Congress enacted the HCFAC program as part of the Health Insurance Portability and 

Accountability Act of 1996 to consolidate and strengthen ongoing efforts to combat fraud 

and abuse in health care programs, including the Medicare and Medicaid programs. Pub. L.

No. 104-191, tit. II, 110 Stat. 1936, 1991 (Aug. 21, 1996). The legislation required the 

establishment of the national HCFAC program and it established the HCFAC account 

within the Medicare Federal Hospital Insurance Trust Fund, which is funded by

appropriations out of the Trust Fund. 

Page 2 GAO-06-705 Medicaid Financial Management
offices. We reviewed and assessed aspects of CMS’s financial oversight 

processes, which include identifying high-risk areas in order to develop an 

annual regional office financial management workplan and conducting 

focused financial reviews of high-risk areas. We reviewed our prior 

reports, and reports by HHS’s Office of Inspector General (OIG) and 

others. We also interviewed officials and staff at the CMS central office in

Baltimore, Maryland, and two regional offices—New York and Chicago.

To determine how CMS used funds from the HCFAC account for fiscal 

years 2003 through 2005, we obtained from CMS a list of Medicaid projects 

that were funded from the HCFAC account during those 3 years. We 

obtained and examined documentation from CMS such as invoices; grant

awards; interagency agreements; and accounting, budget, and payroll 

records that support the information provided by CMS on how it used 

HCFAC funds for that time frame. 

See appendix I for more details about our scope and methodology. We 

requested written comments on a draft of this report from the 

Administrator of CMS or his designee. His written comments are reprinted 

in appendix III. We conducted our review from February 2005 to May 2006 

in accordance with generally accepted government auditing standards. 

CMS has undertaken several steps to improve its Medicaid financial 

management activities, including its efforts to oversee state claims for 

federal reimbursement and to identify payment errors. CMS hired about 90 

funding specialists who are examining high-risk state funding practices 

and working with states to eliminate those practices that inappropriately 

increase federal costs. These new staff have enabled CMS to perform more 

in-depth reviews of high-risk issues. CMS also created a new unit, the 

Division of Reimbursement and State Financing (DRSF), that centralized 

responsibility for reviewing state plan amendments related to 

reimbursement. The activities of DRSF have improved CMS’s ability to 

carry out more targeted oversight activities and have addressed some of 

our previously reported concerns related to deploying its resources and its 

organizational structure. CMS continued to analyze risks and use focused 

financial reviews and OIG audits to identify inappropriate state claims for 

federal reimbursement and recommend changes to states’ internal control 

practices. Conducting focused reviews of issues that CMS identifies 

through its risk analysis has helped CMS identify billions of dollars of 

questionable federal reimbursement. CMS has also set goals aimed at 

reducing questionable federal reimbursement and holding financial 

managers accountable and has enhanced its internal processes for 

Results in Brief 

Page 3 GAO-06-705 Medicaid Financial Management
tracking results of its financial management activities. These and other 

recent efforts such as CMS’s approach to measuring payment errors to 

comply with the Improper Payments Information Act of 2002 also address 

previously identified weaknesses and recommendations from our 2002 

report. However, it is too soon to assess the impact they will have on

improving overall financial management and addressing emerging issues 

that put federal Medicaid dollars at risk because some have just recently 

been initiated and results are not known yet. Further, there are other 

previously identified weaknesses that the agency has not yet addressed. 

Specifically, CMS has not instituted mechanisms to measure how the risk 

of inappropriate federal reimbursement has changed as a result of 

corrective actions taken. In addition, CMS has not incorporated the use of

the Medicaid Statistical Information System (MSIS) database into its 

oversight of states’ claims or other systems projects intended to improve 

its analysis capabilities. Further, CMS has not developed profiles to 

document information on state fraud and abuse controls to use in its 

oversight of state claims. Finally, CMS has not developed a strategic plan 

specific to its Medicaid financial management activities. Because these 

issues are important to further improving and sustaining CMS’s oversight

activities, we reiterate our prior recommendations in these areas. 

During fiscal years 2003 through 2005, CMS received almost $46 million 

from the HCFAC account that it has used to help fund programs related to 

its oversight of the Medicaid program, including about $12 million for the 

funding specialists for fiscal years 2004 and 2005. The funding specialists 

are currently funded on an annual basis with appropriations from the 

HCFAC account. Because CMS competes with other agencies annually for 

HCFAC funds, there is the chance that adequate funding might not be 

provided through the HCFAC process in any given year for the funding 

specialists, and CMS would therefore have to identify another means to 

support the funding specialist positions. Creating permanent funding 

specialist positions is important, given how CMS has been using them in 

performing reviews of high-risk issues. CMS used the other $34 million of 

HCFAC funds for other projects such as developing and enhancing an

integrated financial management tool, researching options for automating 

the Medicaid state plan process, and interagency agreements with the OIG 

to conduct audits of high-risk areas. 

In addition to reiterating several recommendations to CMS from our 2002 

report, we are making two additional recommendations to CMS to further 

improve and sustain its oversight of state claims. Specifically, we 

recommend that the Administrator of CMS (1) create permanent funding 

Page 4 GAO-06-705 Medicaid Financial Management
specialist positions and (2) determine what systems projects are needed to

further enhance data analysis capabilities. 

In written comments on a draft of this report, CMS agreed with our 

findings and recommendations and stated that it will continue examining 

issues raised in this report, including prior recommendations from our 

2002 report that are still outstanding. CMS also stated that it will work to 

implement the two recommendations made in this report. Additional 

details on CMS’s comments and our assessment of them appear in the 

Agency Comments and Our Evaluation section near the end of this report. 

Medicaid is the third largest social program in the federal budget and one 

of the largest components of state budgets. States and CMS share 

responsibility for instituting financial practices for the Medicaid program 

that are in compliance with applicable rules, laws, and regulations. In 

general, the federal government matches state Medicaid spending for 

medical assistance according to a formula based on each state’s per capita 

income. The federal contribution ranged from 50 to 77 cents of every state 

dollar spent on medical assistance in fiscal year 2004. For most state 

Medicaid administrative costs, the federal match rate is 50 percent. For 

skilled professional medical personnel, 75 percent federal matching is 

available. States are responsible for providing the state share of Medicaid 

funding and submitting plans, budgets, and expenditure reports to CMS 

that accurately report on the administration of their Medicaid programs 

and how they expend Medicaid funds. CMS is responsible for reviewing 

the states’ plans, budgets, expenditures, and operations to ensure 

compliance with all applicable laws and regulations. Each state develops

its own administrative structure and establishes its own eligibility 

standards, scope of covered services, and payment rates in accordance 

with Medicaid statute and within broad federal guidelines. States are 

required to describe the nature and scope of their programs in a 

comprehensive plan submitted to CMS, with federal funding depending on

CMS’s approval of the plan. State Medicaid plans specify the services to be

provided and how the state will establish the amount it will pay for those 

covered services. Amendments to states’ plans are also subject to approval 

by CMS. Table 1 shows the amount of state and federal expenditures for 

Medicaid for fiscal years 2003 and 2004, the most recent years for which 

data are available. 

Background 

Page 5 GAO-06-705 Medicaid Financial Management
Table 1: Medicaid Spending in Fiscal Years 2003 and 2004 

Dollars in billions 

FY 2003 Percent FY 2004 Percent

State $115 41.7 $121 41.0

Federal $161 58.3 $174 59.0

Total $276 100 $295 100

Source: GAO analysis of CMS data. 

CMS’s Center for Medicaid and State Operations (CMSO) shares Medicaid 

program administration and financial management responsibilities with 

the 10 CMS regional offices. Two divisions in CMSO’s Finance, Systems, 

and Budget Group—the Division of Financial Management (DFM) and 

DRSF—have primary responsibility for Medicaid financial management. 

Figure 1 outlines CMS’s organizational structure related to Medicaid. 

Page 6 GAO-06-705 Medicaid Financial Management
Figure 1: CMS Organizational Chart

Department of Health and

Human Services

Centers for Medicare &

Medicaid Services

Division of

Financial Management

Center for Medicaid and

State Operations

Family and

Children’s Health

Programs Group

Disabled and

Elderly Health

Programs Group

Survey and

Certification

Group

Finance, Systems

and Budget

Group

Policy

Coordination and

Planning Group

Division of

Reimbursement and

State Financing

Atlanta

Regional Office

Dallas

Regional Office

Chicago

Regional Office

Kansas City

Regional Office

New York

Regional Office

Philadelphia

Regional Office

Boston

Regional Office

Seattle

Regional Office

Denver

Regional Office

San Francisco

Regional Office

Source: CMS.

DFM’s mission includes effectively administering the Medicaid program 

budget and grants, financial management policy, and administrative cost 

policy processes. Among other things, DFM staff in the central office are 

responsible for (1) determining and issuing state grant awards based on 

regional decision reports resulting from reviews of budget and 

expenditure reports, (2) reconciling state expenditure and budget reports, 

(3) reviewing and approving draft focused financial review reports, and 

(4) preparing annual financial management workplans based on input 

from regional offices. 

DRSF’s responsibilities include, but are not limited to (1) reviewing state 

plan amendments that involve reimbursement, (2) providing training to 

and coordinating the work of the funding specialists, (3) providing 

Page 7 GAO-06-705 Medicaid Financial Management
technical assistance to states on institutional and noninstitutional 

reimbursement, and (4) identifying and addressing state financing 

practices that could inappropriately increase federal Medicaid costs. 

CMS has approximately 65 regional financial analysts who are responsible 

for performing activities such as (1) reviewing state quarterly budget 

estimates and expenditure reports, (2) preparing decision reports that 

document approvals for federal reimbursement or deferrals or 

disallowances of claims for federal reimbursement, (3) assisting in 

assessing issues that put federal Medicaid dollars at risk and determining 

which issues to review in a fiscal year, (4) performing focused financial 

reviews, (5) providing technical assistance to the states on financial 

matters, and (6) serving as liaison to the states and audit entities. 

CMS has about 90 funding specialists who are responsible for, among 

other things, (1) gaining an understanding of their assigned state’s 

organizational structure, program structure, and budget process related to

the state’s Medicaid program; (2) assisting in reviews of state plan 

amendments; (3) conducting reviews of state financing practices; and 

(4) providing technical assistance to the states. 

States submit quarterly budget and expenditure reports to CMS. The 

financial analysts in the 10 regional offices have traditionally reviewed 

these reports and prepared a Regional Office Decision memorandum 

which they submit to DFM in the central office. In some regions, the new 

funding specialists now have responsibility for reviews of state budget 

reports. Also, in some cases, the funding specialists assist financial 

analysts with reviews of state expenditure reports. 

CMS has undertaken several steps to improve its Medicaid financial 

management activities including its efforts to oversee state claims for 

federal reimbursement and to identify payment errors. CMS hired about 90 

funding specialists who are examining high-risk state funding practices 

and working with states to eliminate those practices that inappropriately 

increase federal costs. CMS also created a new unit, DRSF, which reviews 

state plan amendments for reimbursement to identify and work with states 

to eliminate payment methodologies that could result in higher federal 

costs. CMS has continued to use focused financial reviews and OIG audits 

to identify inappropriate state claims for federal reimbursement and 

recommend changes to states’ internal control practices. In addition, CMS 

recently established a new performance goal for its Medicaid financial 

management staff to reduce cumulative questionable federal 

Steps Taken to 

Improve Oversight 

Activities but Some 

Previously Identified 

Weaknesses Remain 

Page 8 GAO-06-705 Medicaid Financial Management
reimbursement by 10 percent in fiscal year 2006. These and other recent 

efforts represent improvement in CMS’s oversight activities and address 

weaknesses and recommendations we identified in our 2002 report. 

However, it is too soon to assess the impact they will have on improving 

overall financial management and addressing emerging issues that put 

federal Medicaid dollars at risk because some have just recently been 

initiated, and results are not known yet. Further, there are other 

previously identified weaknesses that the agency has not addressed. CMS 

has not instituted mechanisms to measure how the risk of inappropriate 

federal reimbursement has changed as a result of corrective actions taken.

CMS also has not incorporated the use of the MSIS in its oversight of state 

claims or other systems projects intended to help improve its analysis 

capabilities. Further, CMS has not developed profiles to document 

information on state fraud and abuse controls to use in its oversight of 

state claims. Finally, CMS has not developed a strategic plan to guide its 

financial management activities. Because these issues are important to 

further improving and sustaining CMS’s oversight activities, we reiterate 

our prior recommendations in these areas. 

Additional Staff and 

Creation of New Division 

Have Improved Oversight 

Activities

In late 2004, CMS began hiring for 100 new funding specialist positions.5

These new staff have enabled CMS to perform more in-depth reviews of 

high-risk issues. The funding specialists’ positions were established to help

CMS gain a better understanding of how states budget for and finance 

their portion of Medicaid expenditures and help CMS proactively identify

state payment and funding practices that could result in inappropriate 

claims for federal reimbursement or increased federal costs. These new 

funding specialists augment the activities of approximately 65 financial 

analysts in 10 regional offices who had previously performed many of the 

state financial oversight activities, including assisting the financial analysts 

with reviews of state budget and expenditure reports. In addition, the 

funding specialists performed activities that have enabled CMS to collect 

and summarize more information on states’ Medicaid programs to help 

CMS target its oversight efforts to high-risk issues such as certain payment 

arrangements that have been problematic in the past. 

 5

As of April 25, 2006, 10 funding specialists were assigned to the central office and 80 were

assigned to the regional offices and deployed to the states. There were 10 vacant positions 

in the regional offices. 

Page 9 GAO-06-705 Medicaid Financial Management
A major activity of the funding specialists during their first year was the 

completion of state funding profiles. These profiles document the states’ 

Medicaid programs’ organizational structure, programmatic structure, and 

budget process. For many years, states only needed to provide general 

information on their payment methodologies, so these newly created 

profiles provide more detail to help CMS in its review and oversight of 

states’ financial issues. For example, the profiles 

• describe the sources of each state’s nonfederal share of Medicaid funds 

and state payment methodologies; and 

• include a “watch list” section where the funding specialists can highlight 

significant funding-related concerns that may need to be addressed in the 

future. For example, one state profile identifies a concern about the state’s

lack of oversight of the certified public expenditures certification process 

for hospitals. This type of information can be helpful in ensuring proper 

review of future state plan amendments, among other things.

CMS officials told us the state funding profiles have been made available 

to all CMS staff through CMS’s intranet, and said the profiles will be 

updated annually to account for changes in state programs, thus allowing 

CMS to have current information. 

In addition to completing state funding profiles and reviewing state 

budgets and expenditures, the funding specialists carry out other oversight 

activities, including the following: 

• meeting with state Medicaid officials and monitoring state legislative

activity, including hearings, budget sessions, and committee meetings 

related to states’ Medicaid programs and proposed bills to proactively 

identify issues that need CMS attention; 

• reviewing state payment arrangements that CMS previously deemed 

problematic and that the states agreed to end to determine if the 

arrangements have in fact ended; 

• assisting in the resolution of OIG audit findings;

• providing technical assistance to the states concerning funding and 

financial issues; and 

• attending training and workshops to learn about and stay abreast of CMS 

policy and operations. 

Directing the activities of the new funding specialists is one of the efforts 

of the central office’s DRSF, which was created in early 2005. CMS 

established DRSF to consolidate responsibility for all state Medicaid 

payment policy and funding issues. A role of DRSF is to ensure that state 

Page 10 GAO-06-705 Medicaid Financial Management
plan amendments for reimbursement of noninstitutional and institutional 

services are consistently reviewed and that CMS policy is consistently 

applied across the nation.6

 The activities of DRSF have improved CMS’s 

ability to effectively deploy its resources to carry out more targeted 

oversight activities. DRSF’s National Institutional Reimbursement Team 

and the Non-Institutional Payment Team7

 are part of CMS’s effort to 

collect information on states’ funding methodologies before approving 

state plan amendments, including high-risk payment methodologies that 

have been troublesome in the past. 

DRSF reviews all institutional reimbursement state plan amendments 

before they are approved by the Director of CMSO, thus eliminating the 

decentralized approval process that had been in place at all 10 regional

offices.8

 This has helped to clarify the lines of authority and responsibility 

for the state plan amendment process—states still submit amendments to 

their respective region for review but they are approved by CMS’s central 

office. DRSF also helped clarify responsibilities between central and 

regional office staff by using the 10 central office funding specialists as 

liaisons to each of the 10 regional offices. The DRSF funding specialists 

help to ensure that regional funding specialists are informed and kept up

to date on funding policies and matters. The funding specialists also help 

in conducting a series of monthly calls that DRSF has instituted between 

the regions and central office financial management staff to improve 

communication and coordination. These calls help to ensure that all staff 

stay informed and up to date on matters that impact state claiming and the 

approval of state plan amendments. 

These activities, which we consider significantly underway, help improve 

CMS’s ability to better target its oversight activities and specifically 

address the recommendation in our 2002 report to increase in-depth 

oversight of areas of higher risk as identified from the risk assessment 

 6

We have other ongoing work related to CMS’s review process of proposed state plan 

amendments and plan to report our results later this year. 

7

Institutional reimbursement state plan amendments describe how states will reimburse 

institutions, mainly hospitals and nursing homes, for services they provided to Medicaideligible individuals. Noninstitutional reimbursement state plan amendments cover 

payments to providers of services, mainly physicians.

8

 Noninstitutional reimbursement amendments are still approved by regional offices. 

According to CMS officials, the number of noninstitutional reimbursement amendments is

quite voluminous compared to institutional-related amendments, but the institutional 

amendments involve much larger reimbursement amounts.

Page 11 GAO-06-705 Medicaid Financial Management
efforts and apply fewer resources to lower risk areas. See appendix II for a 

complete listing of our prior recommendations and our assessment of 

whether or not each has been fully addressed by CMS’s actions to improve 

its oversight activities. These activities also help address our overarching 

concerns that CMS’s organizational structure created challenges to 

effective oversight because of unclear lines of authority and responsibility 

between the regions and the central office. 

In 2001, CMS began a risk analysis process to identify Medicaid issues that 

put federal dollars at risk and address those issues by conducting focused 

financial reviews or referring the issues to the OIG for its review. Since 

then, at the beginning of each fiscal year, central office and regional office

financial management staff work together to identify risks and plan 

focused financial reviews of the issues identified. CMS’s financial 

management staff consider factors such as the amount of dollars involved, 

involvement of consultants, and time elapsed since last audit to identify 

risk areas. CMS’s analyses provide insight into what some of the 

continuing problematic Medicaid issues and potential emerging issues are. 

Table 2 shows which areas have consistently been identified as needing indepth review in fiscal years 2003 through 2006.

Table 2: Issues Consistently Planneda for Focused Financial Reviews in Fiscal 

Years 2003 through 2006 

Focused Financial 

Reviews and OIG Audits 

Continued to Identify 

Problems and Needed 

Corrective Actions 

Issues FY 2003 FY 2004 FY 2005 FY 2006 

Home- and Community-based Services 9 9 9 9 

Administrative Contracts/Claims 9 9 9

Medicaid Management Information Systems 9 9 9 

Disproportionate Share Hospital payments 9 9 9 9 

Family Planning Claims 9 9 9 9 

Medical Transportation 9 9 9 9 

Nurse Aide Training Costs 9 9 9

Personal Care Services 9 9 9

State Children’s Health Insurance Program 

(SCHIP) 9 9 9 

School-based Services/Claims 9 9 9 9 

Skilled Professional Medical Personnel 9 9 9 9 

Targeted Case Management 9 9 9 9 

Undocumented Aliens 9 9 9

Upper Payment Limits 9 9 9 9 

Page 12 GAO-06-705 Medicaid Financial Management
Issues FY 2003 FY 2004 FY 2005 FY 2006 

Inter-governmental Transfers 9 9 9 9 

Certified Public Expenditures 9 9 9

Source: GAO analysis of CMS’s annual workplans. 

a

“Consistently planned” means that the type of review was planned in at least 3 of the 4 years. 

Note: In addition to the issues shown, approximately 60 other issues were to be reviewed during the 4 

fiscal years. 

The focused financial reviews of the issues identified from the risk 

analyses have helped CMS identify billions of dollars in unallowable costs 

outside of those detected through the review of quarterly expenditure 

reports, as well as deficiencies in states’ financial management practices. 

In fiscal years 2003 and 2004, focused financial reviews resulted in CMS 

questioning or disallowing about $1.3 billion and about $1 billion, 

respectively, of state claims for federal reimbursement, according to CMS. 

The value of these reviews lies not just in identifying disallowances but 

also in providing feedback on policy issues and programmatic 

vulnerabilities, and in elevating the attention of both states and federal 

staff.9

 CMS conducted about 57 focused financial reviews each year from 

fiscal years 2003 through 2005. Starting in fiscal year 2006, the number of 

planned focused financial reviews almost doubled from fiscal year 2005 

due to the inclusion of planned reviews to be done by the funding 

specialists. 

We reviewed 35 of the 113 focused financial reviews performed by 

regional office financial analysts in fiscal years 2003 and 2004 to assess 

(1) the consistency with which the reviews were performed and reported 

on and (2) the extent to which states took actions to address the issues 

identified by CMS. We concluded that the 35 review reports were generally

consistent across the regions. CMS also provided information to support 

that states are taking the recommended actions to address the issues 

identified. CMS issued reports to the states that contained 

recommendations requesting the states to (1) return federal 

reimbursement that CMS determined was not allowable (disallowances), 

(2) provide additional documents for CMS to determine the allowability of 

questionable claims (deferrals), or (3) improve certain state controls or 

processes. 

 9

Kaiser Commission on Medicaid and the Uninsured, Medicaid’s Federal-State

Partnership: Alternatives for Improving Financial Integrity (February 2004), p. 20. 

Page 13 GAO-06-705 Medicaid Financial Management
CMS gets additional coverage of risk areas from the reviews conducted by

HHS’s OIG. During fiscal years 2003 through 2005, CMS contracted with 

OIG using funds from the HCFAC account to conduct 20 or more audits 

each year of issues identified from the risk assessment process. We 

reviewed interagency agreements between CMS and OIG for fiscal years 

2003 through 2005 that provided over $3 million of HCFAC funds each year 

for OIG to do 20 or more audits each year relating to Medicaid issues. The 

interagency agreements supplemented OIG’s overall efforts to monitor 

Medicaid. Table 3 shows the issues that OIG agreed to audit in selected 

states pursuant to the interagency agreements for fiscal years 2003

through 2005. 

Table 3: Issues To Be Audited by the OIG in Fiscal Years 2003 through 2005 

OIG audit issue FY 2003 FY 2004 FY 2005 

Upper Payment Limit Calculation 9 

School-Based Administrative Costs 9 9 

School-Based Services 9 9 

Home- and Community-based Services 9 

Medicaid Administrative Costs 9 9 

Adult Rehabilitation Services 9 

Waivers for Demonstration Projects 9 

Personal Care Services 9 

Home Health Services 9 

Medicaid/SCHIP Duplicate Payments 9 

Targeted Case Management 9 

Medicaid Management Information Systems 

Expenditures 9 9 

Revenue Sharing 9 

Rehabilitation Services for People with Mental Illness 9 

Institutions for Mental Diseases 9 

Vaccines for Children 9 

Family Planning Services 9 

Skilled Professional Medical Personnel 9 9 

Provider Overpayments 9 9 

Provider Tax 9 

Community Mental Health Center Administrative Costs 9 9 

Graduate Medical Education 9 

Disproportionate Share Hospital Payments 9 

County Administrative Case Management Services 9 

Page 14 GAO-06-705 Medicaid Financial Management
OIG audit issue FY 2003 FY 2004 FY 2005 

County Administrative Services 9 

Medicaid Buy-In 9 

Physician Supplemental Payment Program 9 

Enhanced Funding for State Government Hospitals 9 

Personal Needs Allowance for Nursing Home

Residents 9 

Additional Reimbursement for Nursing Facilities of 

Public Hospitals 9 

Medicaid Expenditures for Nursing Facilities 9 

Source: CMS. 

We reviewed 21 audits done by OIG in fiscal year 2004 pursuant to the 

interagency agreement to assess (1) the extent of the additional coverage 

given to issues identified by CMS as high risk and (2) the extent to which

states took actions to address the issues identified by OIG. OIG identified 

about $13.6 million that it believed was inappropriate federal 

reimbursement to the states in 15 of the 21 audits. States returned about 

$4.5 million of disallowed claims identified in 10 of the 15 audits; CMS was 

still pursuing the remaining $9.1 million as of the end of our field work. 

OIG also made numerous other recommendations to states to improve 

their internal controls such as implementing controls to identify and 

prevent duplicate payments and complete reconciliation procedures for 

overpayments in a timely manner. 

CMS has recently developed a specific goal aimed at reducing 

questionable federal reimbursement and evaluating its oversight activities. 

CMS has established a goal to reduce by 10 percent in fiscal year 2006 the 

amount of federal reimbursement that has been questioned by CMS or 

OIG. CMS is collecting data on questionable claims for federal 

reimbursement identified from sources such as quarterly expenditure 

reviews, focused financial reviews, and OIG audits. According to a CMS 

official, as part of this process, CMS has identified a baseline amount of 

about $8 billion dollars in cumulative questionable federal reimbursement, 

which represents state claims that (1) CMS has determined may not be

allowable or has deferred payment pending review of additional support 

from the states, or (2) OIG has questioned as a result of an audit. The goal

for fiscal year 2006 is to resolve at least 10 percent of this $8 billion by 

(1) recovering amounts ultimately determined to be unallowable or 

(2) determining after further review that the claims are allowed. CMS 

officials acknowledge that the goal may not be attainable each year given 

Goal for Reducing 

Questionable Federal 

Reimbursement Helps 

Promote Accountability 

Page 15 GAO-06-705 Medicaid Financial Management
the varying facts and circumstances of the questionable amounts. 

However, if properly established and tracked, goals of this nature should 

help in improving the effectiveness of CMS oversight activities.

CMS has also included the goal to reduce by 10 percent the amount of 

questionable federal reimbursement in the fiscal year 2006 performance 

agreements of CMS senior financial managers in the central office. 

According to CMS officials, it will continue to hold managers accountable 

for this type of goal each fiscal year. CMS has also included specific goals

and performance standards in regional office financial managers’ 

performance agreements. For example, one regional office has a goal for 

its managers to ensure that the financial analysts and funding specialists 

complete nine focused financial reviews and five funding source reviews 

in fiscal year 2006. 

CMS has improved its processes for tracking its financial management 

activities and the attainment of the goals it has set. The Financial 

Management Activities Report (FMAR) tracks the amount of regional 

office resources (staff time, personnel costs, and travel costs) spent on the 

various categories of activities in the financial management workplans. 

The Financial Issues Report tracks all questionable state claims for 

reimbursement identified by regional financial analysts and funding 

specialists in focused financial reviews, quarterly expenditure reviews, 

and any other activities that could result in a disallowance or deferral of 

state claims, including findings from OIG reports. The Financial 

Performance Spreadsheet is the CMS tool used to track the fiscal year 

2006 goal to resolve 10 percent of the amount of cumulative, questioned 

claims for federal reimbursement. 

These actions, which we consider significantly underway, help improve 

CMS’s ability to monitor, measure, and evaluate its financial oversight 

activities and specifically address the following recommendations from 

our 2002 report: 

• Include specific Medicaid financial oversight performance standards in 

senior managers’ performance agreements. 

• Collect, analyze, and compare trend information on the results of 

oversight control activities, particularly deferral and disallowance 

determinations, focused financial reviews, and technical assistance. 

• Use the information collected above to assess overall quality of financial

management oversight. 

Page 16 GAO-06-705 Medicaid Financial Management
CMS has initiated two other programs to help carry out its responsibility at 

the federal level for helping ensure the propriety of Medicaid finances and 

comply with the Improper Payments Information Act of 200210—the 

Payment Accuracy Measurement pilot project, which was initiated in July 

2001 and is now called the Payment Error Rate Measurement (PERM) 

project, and the Medicare-Medicaid data match project. Under the PERM 

program, states use a CMS-developed methodology to measure state 

Medicaid payment errors. By fiscal year 2007, CMS plans to have a national 

Medicaid payment error rate based on a sample of states and claims within 

those states.11 Under PERM, states will be expected to ultimately reduce 

their payment error rates over time by better targeting their activities to 

prevent and detect improper payments made to providers. Under the 

Medicare-Medicaid data match project, CMS facilitates the sharing of 

information between the Medicare and Medicaid programs by matching 

Medicare and Medicaid claims information on providers and beneficiaries 

to identify improper billing and utilization patterns which could indicate 

fraudulent schemes. 

These two projects, which we consider significantly underway, have 

helped CMS’s efforts to oversee state Medicaid finances and specifically 

address the following two recommendations from our 2002 report: 

• Complete efforts to develop an approach to payment accuracy reviews at 

the state and national levels. 

• Incorporate advanced control techniques, such as data mining, data

sharing, and neural networking, where practical to detect potential 

improper payments. 

While CMS has taken a number of actions that improve its oversight and

address several weaknesses we identified in our prior report, there are 

previously identified weaknesses that the agency has not yet addressed. 

Specifically, CMS has not instituted mechanisms to measure how the risk 

of inappropriate federal reimbursement has changed as a result of 

corrective actions taken. In addition, CMS has not incorporated the use of

the MSIS database into its oversight of states claims or other systems 

Other Efforts Help CMS’s 

Oversight of Medicaid 

Finances

Some Previously Identified 

Weaknesses in Oversight 

Activities Have Yet to be 

Addressed 

 10Pub. L. No. 107-300, 116 Stat. 2350 (Nov. 26, 2002). 

11For additional information on the PERM project, see GAO, Improper Payments: Federal 

and State Coordination Needed to Report National Improper Payment Estimates on

Federal Programs, GAO-06-347 (Washington, D.C.: Apr. 14, 2006). 

Page 17 GAO-06-705 Medicaid Financial Management
projects intended to improve its analysis capabilities. CMS also has not 

developed profiles to document information on state fraud and abuse 

controls to use in its oversight of state claims. Finally, CMS has not 

developed a strategic plan specific to its Medicaid financial management 

activities. 

Measuring how risks have changed—In our 2002 report, we 

recommended that CMS develop and institute mechanisms to make risk 

assessment a continuous process and to measure whether risks have 

changed as a result of corrective actions taken to address them. CMS has 

processes in place to identify risks, and management has established 

procedures to mitigate important risks, such as detailed reviews of certain 

high-risk issues. However, CMS’s processes still do not have the elements 

of risk management that are key to assessing whether actions to mitigate 

risks need to be adjusted either because (1) they are not effective, (2) they 

are effective but need to be expanded, or (3) they are no longer needed 

because the risks have been resolved or reduced to a tolerable level. 

For example, CMS identified several Medicaid issues as part of its current 

risk assessment process that have been the subject of focused financial

reviews across several states, for several years—issues such as those 

related to claims for skilled professional medical personnel, family 

planning, and school-based administrative services. As discussed earlier, 

CMS has issued reports to the states on these issues that contained 

recommendations requesting the states to (1) return federal 

reimbursement that CMS determined was not allowable (disallowances), 

(2) provide additional documents for CMS to determine the allowability of 

questionable claims (deferrals), or (3) improve certain state controls or 

processes. However, CMS’s current risk assessment process does not 

indicate how the corrective actions taken to address these issues have 

changed their assessment of risk or their future strategies for mitigating 

the risk that these issues pose. 

To CMS’s credit, it has recently taken steps to change policies related to 

state claims for targeted case management services,12 an issue that has 

been the subject of multiple focused financial reviews. While it is not clear

from CMS’s risk assessment why this issue was given a higher priority than

 12Targeted case management services are services which assist an individual in gaining

access to needed medical, social, education, and other services. Proposed changes are

estimated to save $2.1 billion over 10 years. 

Page 18 GAO-06-705 Medicaid Financial Management
other issues identified from its risk assessment, CMS officials explained 

that their process for determining what might be a high-risk issue comes 

from continuous coordination between financial management staff and 

Medicaid program staff that have in-depth program knowledge about

Medicaid policy and procedures. The officials further explained that the

results of their coordination and the fact that an issue is a high priority 

may not be noticeable to others until policy changes are included, for 

example, in HHS’s budget submission or other legislation that is signed by

the President. 

Documenting how the outcomes of detailed reviews are used to determine 

whether additional or fewer corrective actions are needed is an important 

step in risk management. For fiscal year 2006, CMS is planning to conduct 

additional detailed reviews intended to ensure that states have stopped 

certain intergovernmental transfers and other funding practices that have 

resulted in billions of dollars in inappropriate federal reimbursement.13 It 

will be important to use the results of these follow-up reviews as a basis to 

determine whether its prevention and mitigation steps are adequate and 

effective and then to adjust them accordingly. Fully documenting the 

results of these types of activities will help inform planning for future 

mitigation efforts. 

Because CMS has not fully implemented mechanisms to measure how 

risks have changed as a result of actions to address the risks, we are 

reiterating our prior recommendation in this area.

Improving analysis capabilities—In our 2002 report, we recommended 

that CMS use comprehensive Medicaid payment data that states must 

provide to the national MSIS database. Use of these data could improve 

CMS’s analysis capabilities. MSIS contains Medicaid program information 

including data on billions of claims. This database could be used to 

identify trends in certain Medicaid services from prior-year claims that 

could be useful in analyzing current-year state claims. According to a CMS 

official, CMS has not yet developed the ability to make these data available 

for use by the financial analysts and funding specialists in their oversight 

activities. Further, only a few CMS staff with the requisite systems 

capabilities are currently able to access and analyze the data. CMS officials 

 13CMS has been working with states to terminate certain funding and payment practices.

We have other ongoing worked related to CMS’s oversight of these payment arrangements 

and plan to report our results later this year. 

Page 19 GAO-06-705 Medicaid Financial Management
said they plan to make these data more accessible in the future. Because 

CMS has not yet incorporated use of MSIS in its oversight activities, we are 

reiterating our prior recommendation. 

CMS also has not yet completed two other systems projects intended to 

help improve its analysis capabilities. CMS started to develop the: 

(1) Transactions, Information Inquiry, and Program Performance System 

project—an integrated financial management tool intended to link existing

Medicaid data systems and tools; and (2) Automated Medicaid State Plans 

Project—a project to explore collecting electronic submission of state 

plans that would provide timely access to critical program information. 

CMS officials told us that due to funding constraints, these two projects 

have yet to be completed. Determining the systems projects needed to

enhance CMS’s analysis capabilities is important given the challenges of 

evaluating state Medicaid expenditures and funding practices. 

Collecting and using information on state fraud and abuse control

activities—In our 2002 report, we recommended that CMS enhance the 

information that it uses in its oversight of state claims by creating profiles 

that document each state’s activities to oversee its Medicaid program and 

prevent fraud and abuse. For example, we recommended that the profiles 

include information on provider screening procedures and payment 

accuracy studies. CMS currently collects some information on these and 

other state program integrity efforts as part of compliance reviews that are 

conducted by program integrity staff in DFM and the 10 regional offices.14

These compliance reviews are to assess whether state Medicaid program 

integrity efforts comply with federal requirements such as those governing 

provider enrollment, claims review, and coordination with each state’s 

Medicaid Fraud Control Unit.15 However, CMS officials told us that there is 

limited coordination between the staff that conduct the compliance 

reviews and the financial management staff that oversee state claims. 

Further, the compliance reviews have focused on state compliance and 

have not evaluated the effectiveness of the states’ fraud and abuse 

prevention and detection activities. 

 14According to a CMS official, its Medicaid staff resources allocated to supporting or

overseeing states’ antifraud and abuse operations was an estimated 6.1 FTEs—2.6 FTEs at 

headquarters and 3.5 FTEs in the regional offices. 

15As we have reported in the past, CMS has only conducted about eight state compliance 

reviews a year due to staffing and funding constraints. 

Page 20 GAO-06-705 Medicaid Financial Management
CMS is starting to develop strategies as part of the recently created 

Medicaid Integrity Program that could address the weaknesses that we 

have identified. The Deficit Reduction Act of 2005,

16 enacted in February 

2006, provided for the creation of a Medicaid Integrity Program and 

required CMS to develop a comprehensive plan for how it would 

implement the program. CMS officials have recently begun to develop the 

plan and have included proposals for hiring contractors to assess states’ 

program integrity activities. 

Information on states’ activities to oversee their Medicaid programs and 

prevent fraud and abuse is important to determine the appropriate level of

federal oversight that should be applied to each state’s claims. Because 

CMS is just starting to develop its plan and results are not known yet, we 

are reiterating our prior recommendations in this area. 

Developing a strategic plan to guide Medicaid financial 

management activities—In our 2002 report, we reported that CMS was 

starting several initiatives, similar to what we are currently reporting, to 

bring about improvements in its financial management activities and 

oversight. At the time of our 2002 review, CMS did not have a written 

strategic plan that described its many oversight activities and initiatives 

and the staff responsible for implementing them. Therefore, we 

recommended that CMS develop a written plan and strategy for Medicaid 

financial oversight. However, CMS still has not published a comprehensive 

plan that describes the many aspects of its Medicaid financial management 

strategy and its plans for continuing and sustaining its recent improvement 

efforts. 

A strategic plan is a key management tool that can help clarify 

organizational priorities and unify agency staff in the pursuit of shared 

goals. Strategic plans are the starting point and basic underpinning for a 

system of program goal-setting and performance measurement. In 

accordance with the Government Performance and Results Act of 1993 

(GPRA),

17 a multiyear strategic plan articulates the fundamental mission 

(or missions) of an organization, and lays out its long-term general goals 

for accomplishing that mission, including the resources needed to reach 

these goals. The clearer and more precise these goals are, the better able 

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

17 Pub. L. No. 103-62, 107 Stat. 285 (Aug. 3, 1993). See 5 U.S.C. §306. 

Page 21 GAO-06-705 Medicaid Financial Management
the organization will be to maintain a consistent sense of direction, 

regardless of leadership changes. 

HHS prepares a strategic plan as required by GPRA.18 The HHS strategic 

plan contains eight broad program performance goals related to the 

missions and programs of its operating divisions. However only one goal 

relates to Medicaid financial management—an overall goal for all HHS 

programs to “achieve excellence in management practices.” Unlike the 

Medicare program that started publishing a separate comprehensive plan

for financial management in fiscal year 2001 that outlined problems and 

plans to address weaknesses in the Medicare program’s internal controls, 

oversight, and financial systems,19 the Medicaid program has not 

developed its own plan for financial management that includes an 

appropriate level of detail to be useful as a tool to guide its financial 

managers. 

Medicaid officials told us that they have several planning documents—

such as the annual financial management work plans, the FMAR, and the 

Financial Issues Report that we previously discussed—that they use in 

managing financial management activities. While these documents provide 

information on aspects of CMS’s financial management activities, they do 

not clearly define the mission of Medicaid financial management, lay out 

the goals for continuously implementing the mission, or provide a 

complete description of the operational processes, skills, technology, and 

other resources required to meet CMS’s financial management goals and 

objectives. 

Without a strategic plan, CMS lacks an appropriate “roadmap” to guide 

activities for ensuring sound financial management of the Medicaid 

program. Therefore, we are reiterating our recommendation in this area.

During fiscal years 2003 through 2005, CMS received almost $46 million 

from the HCFAC account that it has used to help fund programs related to 

its oversight of Medicaid. Congress enacted the HCFAC program as part of 

the Health Insurance Portability and Accountability Act of 1996 to 

consolidate and strengthen ongoing efforts to combat fraud and abuse in 

health care programs, including the Medicare and Medicaid programs. The 

Use of HCFAC Funds 

to Enhance Medicaid 

Oversight Initiatives 

 18 5 U.S.C. § 306. 

19 Kaiser, p. 11. 

Page 22 GAO-06-705 Medicaid Financial Management
legislation required the establishment of the national HCFAC program and 

it established the HCFAC account within the Medicare Federal Hospital 

Insurance Trust Fund, which is funded by appropriations out of the Trust 

Fund. The HCFAC program is administered by HHS and the Department of 

Justice and is designed to coordinate federal, state, and local law 

enforcement activities with respect to health care fraud and abuse. HHS’s 

OIG, the Federal Bureau of Investigation, and the Medicare Integrity 

Program receive direct appropriations from the HCFAC account, while the 

Medicaid program must request funds from the HCFAC account and 

compete with other HHS programs, such as the Administration on Aging 

and the Office of General Counsel, for allocations from the discretionary 

part of the HCFAC account.20 Table 4 shows the discretionary HCFAC 

funds available to CMS in fiscal years 2003 through 2005 and the portion 

allocated to the Medicaid program run by CMSO for Medicaid financial

management projects. 

Table 4: Discretionary HCFAC Funds for CMS and CMSO’s Allocation 

Dollars in millions 

FY 2003 FY 2004 FY 2005 Totals

Total discretionary HCFAC funds for CMS $23.37 $22.75 $31.14 $77.26

CMSO allocation $9.56 $17.08 $18.91 $45.55

Source: CMS and HHS/OIG. 

CMSO used this money to help fund projects related to its oversight of 

Medicaid. Table 5 shows the various projects for the 3 fiscal years and the 

amounts allocated to those projects. 

 20Discretionary funds are appropriated from the Trust Fund to the HCFAC account to cover

HCFAC program costs in amounts the Secretary of HHS and the Attorney General certify as

necessary. 42 U.S.C. § 1395i(k)(3)(A)(i). 

Page 23 GAO-06-705 Medicaid Financial Management
Table 5: Medicaid Financial Management Projects and Their HCFAC Allocations for

Fiscal Years 2003 through 2005 

Dollars in millions 

Projects FY 2003 FY 2004 FY 2005 Totals

Funding specialists (new staff) $1.69 $10.36 $12.05

OIG interagency agreement audits $3.01 5.66 3.80 12.47

Medicare-Medicaid data match project 3.74 3.26 7.0

Payment Accuracy 

Measurement/PERM/SCHIP Error Rate Pilot 

3.70 3.81 1.20 8.71

Transactions, Information Inquiry, and 

Program Performance System

2.02 1.68 0.29 3.99

Other projects 0.83 0.50 1.33

Totals $9.56 $17.08 $18.91 $45.55

Source: CMS. 

The HCFAC account provided about $12 million to CMS for the funding 

specialists for fiscal years 2004 and 2005. The funding specialists have 

been funded on an annual basis with appropriations from the HCFAC 

account. There is the chance that adequate funding might not be provided

through the HCFAC process in any given year for the funding specialists; 

thus CMS officials have told us they would like to pursue ways of making 

the funding specialist positions permanent. CMS officials told us that there 

was a provision in its fiscal year 2007 budget submission, but the provision 

was rejected during department-level discussions, so the funding 

specialists will continue to be funded on an annual basis with HCFAC 

funds. CMS officials also told us that some of the turnover of funding 

specialist staff was due to the uncertainty of funding and whether the 

positions would become permanent. Creating permanent funding 

specialist positions is important, given how CMS has been using them in 

performing reviews of high-risk issues. 

Other Medicaid projects included in table 5 that CMS used HCFAC funds 

for include:

• interagency agreements between CMS and OIG for OIG audits of high-risk 

issues such as family planning services in managed care, skilled 

professional medical personnel, upper payment limits, school-based 

claims, home- and community-based services, and Medicaid administrative 

costs reported by state agencies other than the Medicaid single state 

agency; 

Page 24 GAO-06-705 Medicaid Financial Management
• Medicare-Medicaid data match project developed to identify improper 

billing and utilization patterns by matching Medicare and Medicaid claims 

information on providers and beneficiaries; 

• Payment Accuracy Measurement, PERM, and SCHIP Error Rate Pilot 

Projects, which allow states to test a methodology to determine improper 

payment error rates in their SCHIP and/or Medicaid programs; 

• Transaction, Information, Inquiry and Program Performance System to 

develop and enhance an integrated financial management tool linking 

existing CMSO data systems and tools containing critical financial, 

statistical, administrative, and other data; 

• an organizational study of Medicaid financial processes within CMS done 

by OIG under an interagency agreement with OIG; 

• a project referred to as the Annuities Project, which used both qualitative 

and quantitative research methods to develop a comprehensive picture of

states’ experience with the use of annuities as an asset-sheltering device

by Medicaid applicants and their spouses; 

• a Waiver Management System Database project, which updated a current 

Waiver Management System Database; and 

• a project to research options for automating the Medicaid state plan 

process from the creation and submission of state plan amendments at the 

state level through approval at the central office and regional offices. 

We obtained documentation to support the use of HCFAC funds for the 

above projects. 

Since we last reported in 2002, CMS has made improvements to the 

processes it uses in its efforts to oversee states and identify payment 

errors. Efforts undertaken, such as the hiring of the funding specialists, 

consolidating the review of reimbursement state plan amendments, and 

the Medicare-Medicaid data match project have enhanced CMS’s ability to 

identify issues that put federal Medicaid dollars at risk. While CMS’s 

actions address previously identified weaknesses and recommendations 

from our 2002 report related to (1) targeting resources to higher risk areas, 

(2) monitoring performance, (3) establishing mechanisms for ensuring 

accountability, (4) developing an approach to payment accuracy reviews 

and (5) incorporating advanced control techniques, it is too soon to assess 

the impact they will have on improving overall financial management and 

addressing emerging issues that put federal Medicaid dollars at risk 

because the results of some efforts are not known yet. 

In addition, several weaknesses remain in CMS’s oversight that could be

addressed by implementing our prior recommendations that remain open.

Conclusions 

Page 25 GAO-06-705 Medicaid Financial Management
Specifically, CMS still lacks processes to adjust oversight activities for 

changes in risk; therefore, we reiterate our prior recommendation related 

to measuring whether risks have changed as a result of corrective actions

to address them. Also, because CMS has not yet addressed weaknesses we 

identified in its analysis capabilities, we reiterate our prior 

recommendation for CMS to incorporate using MSIS data in its analysis of 

state claims. We also reiterate our prior recommendations to CMS for 

collecting and using information on state fraud and abuse control 

activities because this information is important to determining the 

appropriate level of federal oversight of state claims. 

The absence of a strategic plan could hinder CMS in sustaining its current 

efforts and addressing the weaknesses that we have identified. Therefore, 

we reiterate our prior recommendation that CMS develop a strategic plan 

specific to Medicaid financial management. Also, CMS may not have the

staff and systems needed to continuously identify and target high-risk 

issues. Therefore, we stress the importance of creating permanent funding 

specialist positions and determining what systems projects are needed to 

improve their analysis capabilities. 

To further improve and sustain CMS’s oversight of state claims, including 

its ability to identify and address emerging issues, we recommend that the 

Administrator of CMS take the following two additional actions: 

• Create permanent funding specialist positions. 

• Determine what systems projects are needed to further enhance data

analysis capabilities. 

In written comments on a draft of this report, which are reprinted in 

appendix III, CMS agreed with our findings and recommendations and 

stated that it will continue examining issues raised in this report, including 

prior recommendations from our 2002 report that are still outstanding. 

CMS also stated that it will work to implement the two recommendations 

made in this report. CMS expressed its support for our recommendation to 

create permanent funding specialist positions, which are currently funded 

with HCFAC dollars, and stated it will consider alternative approaches to 

provide adequate resources. CMS further stated it will follow our second 

recommendation and begin the process of determining the system projects 

that are needed to further enhance data capabilities. CMS also provided 

additional information on several of the activities we reported on, 

Recommendations for 

Executive Action 

Agency Comments 

and Our Evaluation 

Page 26 GAO-06-705 Medicaid Financial Management
including additional activities of the funding specialists and actions being 

taken on our prior recommendations. 

As we agreed with your office, unless you publicly announce the contents

of this report earlier, we plan no further distribution of it until 30 days 

from the date of this letter. We will then send copies to the Secretary of 

Health and Human Services, Administrator of CMS, Inspector General of

HHS, and other interested parties. Copies will be made available to others

upon request. In addition, this report will be available at no charge on the 

GAO Web site at http://www.gao.gov. 

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

at (202) 512-8341 or calboml@gao.gov. Contact points for our Office of 

Congressional Relations and Public Affairs may be found on the last page 

of this report. Major contributors are acknowledged in appendix IV. 

Linda Calbom

Director, Financial Management and Assurance 

Page 27 GAO-06-705 Medicaid Financial Management
Appendix I: Scope and Methodology Appendix I: Scope and Methodology 

To identify the extent to which the Centers for Medicare & Medicaid 

Services (CMS) has improved its oversight, including its ability to identify 

and address emerging issues that put federal Medicaid dollars at risk, we 

performed work at CMS headquarters and two regional offices. We 

reviewed and assessed aspects of CMS’s financial oversight processes, 

which include identifying high-risk areas in order to develop an annual 

regional office financial management workplan and conducting focused 

financial reviews of high-risk areas. We reviewed 35 of the 113 focused 

financial reviews conducted by CMS regional offices for fiscal years 2003 

and 2004. We selected reviews of specific issues that were reviewed across 

regions and fiscal years, such as disproportionate share hospital payments

and school-based administrative services. We did not select certain issues, 

such as upper payment limits and intergovernmental transfers, because 

these issues have been well-covered in other reports and by CMS’s actions. 

We looked for consistency of the reviews among regions and fiscal years 

and the extent to which states implemented CMS’s recommendations. We 

obtained and reviewed documentation showing the activities and work 

performed by the new funding specialists hired by CMS during 2004 and 

2005 as part of its efforts to improve its financial management of the 

Medicaid program. We reviewed our prior reports and reports by the 

Department of Health and Human Service’s Office of Inspector General 

(OIG) and others. We also reviewed interagency agreements between CMS 

and OIG. We interviewed OIG staff, and CMS officials and staff at the CMS 

central office in Baltimore, Maryland, and two regional offices—New York 

and Chicago. We selected the New York and Chicago regional offices to 

visit based on the number of focused financial reviews we selected to 

review that were performed by these regions. Sixteen of the 35 focused 

financial reviews we selected to review were performed by these two 

regions; the remaining 19 focused financial reviews were done by seven 

other regional offices. We also considered the Comptroller General’s 

Standards for Internal Control in the Federal Government.

1

To determine how CMS used funds from the Health Care Fraud and Abuse 

Control (HCFAC) account for fiscal years 2003 through 2005, we obtained 

from CMS a list of Medicaid projects that were funded from the HCFAC 

account in fiscal years 2003 through 2005. We obtained and examined 

documentation from CMS such as invoices; grant awards; interagency

agreements; and accounting, budget, and payroll records that support the 

 1

 GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1 

(Washington, D.C.: November 1999). 

Page 28 GAO-06-705 Medicaid Financial Management
Appendix I: Scope and Methodology 

information provided by CMS on how it spent HCFAC funds for fiscal 

years 2003 through 2005. We also reviewed the HCFAC program and 

funding legislation, 42 U.S.C. §§ 1320a-7c, 1395i(k). 

We requested written comments on a draft of this report from the 

Administrator of CMS or his designee. His written comments are reprinted 

in appendix III. We conducted our review from February 2005 to May 2006 

in accordance with generally accepted government auditing standards. 

Page 29 GAO-06-705 Medicaid Financial Management
Appendix II: Status of Prior 

Recommendations 

Table 6: Recommendations Made in GAO-02-300 – Medicaid Financial Management: Better Oversight of State Claims for

Federal Reimbursement Needed (February 2002) 

Recommendation Status and action(s) taken

Risk assessment 

The Centers for Medicare & Medicaid Services (CMS) administrator 

should revise current risk assessment efforts in order to more 

effectively and efficiently target oversight resources towards areas 

most vulnerable to improper payments by taking the following 

actions. 

1. Collecting, summarizing, and incorporating profiles of state 

financial oversight activities that include information on state 

prepayment edits, provider screening procedures, postpayment 

detection efforts, and payment accuracy studies. 

2. Incorporating information from reviews of state initiatives to 

prevent Medicaid fraud and abuse. 

3. Developing and instituting feedback mechanisms to make risk 

assessment a continuous process and to measure whether risks 

have changed as a result of corrective actions taken to address 

them. 

4. Completing efforts to develop an approach to payment accuracy 

reviews at the state and national levels. 

Recommendations 1 and 2: Open/reiterate

CMS currently collects some information on state program 

integrity efforts as part of compliance reviews that are 

conducted to assess whether state Medicaid program integrity 

efforts comply with federal requirements. Also, CMS is starting 

to develop strategies as part of the recently created Medicaid 

Integrity Program that include proposals for hiring contractors to 

assess states’ program integrity activities. Because CMS is just 

starting these efforts and results are not known yet, we are 

reiterating our prior recommendations in this area. 

Recommendation 3: Open/reiterate 

CMS’s processes still lack elements of risk management that

are key to assessing whether actions to mitigate risks need to 

be adjusted either because (1) they are not effective, (2) they 

are effective but need to be expanded, or (3) they are no longer 

needed because the risks have been resolved or reduced to a 

tolerable level. Therefore, we are reiterating our prior 

recommendation. 

Recommendation 4: Closed implemented

In July 2001, CMS initiated the Payment Accuracy 

Measurement pilot project, now called the Payment Error Rate 

Measurement (PERM) project. Under the PERM program, 

states use a CMS-developed methodology to measure state 

Medicaid payment errors. By fiscal year 2007, CMS plans to 

have a national Medicaid payment error rate based on a 

sample of states and claims within those states. These actions, 

which we consider significantly underway, help improve CMS’s 

ability to ensure payment accuracy and address our 

recommendation. 

Appendix II: Status of Prior 

Recommendations 

Page 30 GAO-06-705 Medicaid Financial Management
Appendix II: Status of Prior 

Recommendations 

Recommendation Status and action(s) taken

Financial oversight control activities 

The CMS administrator should restructure oversight control activities 

by taking the following actions.

5. Increasing in-depth oversight of areas of higher risk as identified 

from the risk assessment efforts and applying fewer resources 

to lower risk areas. 

6. Incorporating advanced control techniques, such as data 

mining, data sharing, and neural networking, where practical to 

detect potential improper payments. 

7. Using comprehensive Medicaid payment data that states must 

provide in the legislatively mandated national Medicaid 

Statistical Information System (MSIS) database. 

Recommendation 5: Closed implemented

The new funding specialists are helping CMS to collect and 

summarize more information on states’ Medicaid programs to 

help CMS target its oversight efforts to high-risk issues such as 

certain payment arrangements that have been problematic in 

the past. A major activity of the funding specialists during their 

first year was the completion of state funding profiles to help 

CMS in its review and oversight of the states’ financial issues. 

For example, the profiles include a “watch list” section where 

the funding specialists can highlight significant funding-related 

concerns that may need to be addressed in the future. These 

actions, which we consider significantly underway, address our 

prior recommendation. 

Recommendation 6: Closed implemented

CMS developed and implemented the Medicare-Medicaid data 

match project. Under this data match project, CMS facilitates

the sharing of information between the Medicare and Medicaid 

programs by matching Medicare and Medicaid claims 

information on providers and beneficiaries to identify improper 

billing and utilization patterns which could indicate fraudulent 

schemes. These actions, which we consider significantly 

underway, address our prior recommendation. 

Recommendation 7: Open/reiterate 

CMS has not yet developed the ability to make these data 

available for use by the financial analysts and funding 

specialists in their oversight activities. The MSIS database is

very voluminous as it contains data on billions of claims. CMS 

officials said they plan to make these data more accessible in 

the future. Because CMS has not yet incorporated use of MSIS 

in its oversight activities, we are reiterating our prior 

recommendation. 

Page 31 GAO-06-705 Medicaid Financial Management
Appendix II: Status of Prior 

Recommendations 

Recommendation Status and action(s) taken

Monitoring performance

The CMS administrator should develop mechanisms to routinely 

monitor, measure, and evaluate the quality and effectiveness of 

financial oversight, including audit resolution, by taking the following 

actions. 

8. Collecting, analyzing, and comparing trend information on the 

results of oversight control activities, particularly deferral and

disallowance determinations, focused financial reviews, and

technical assistance. 

9. Using the information collected above to assess overall quality 

of financial management oversight. 

10. Identifying standard reporting formats that can be used

consistently across regions for tracking open audit findings and 

reporting on the status of corrective actions. 

11. Revising Division of Audit Liaison audit tracking reports to 

ensure that all audits with Medicaid-related findings are 

identified and promptly reported to the regions for timely 

resolution. 

Recommendations 8 and 9: Closed implemented

CMS has improved its processes for tracking the results of 

financial management activities. CMS uses several tracking

reports—the Financial Management Activities Report (FMAR), 

the Financial Issues Report, and the Financial Performance

Spreadsheet. The FMAR tracks the amount of regional office

resources (staff time, personnel costs, and travel costs) spent 

on the various categories of activities in the financial 

management workplans. The Financial Issues Report tracks all 

questionable state claims identified by regional financial 

analysts and funding specialists in financial management 

reviews and any other activities that resulted in a disallowance 

or deferral of state claims, including findings from Office of 

Inspector General (OIG) reports. The Financial Performance 

Spreadsheet is the CMS tool used to track the fiscal year 2006 

goal to resolve 10 percent of the amount of cumulative, 

questioned claims for federal reimbursement. These actions,

which we consider significantly underway, help improve CMS’s 

ability to monitor, measure, and evaluate its financial oversight 

activities and address our prior recommendations. 

Recommendations 10 and 11: Open 

CMS did not agree with these prior recommendations on audit 

tracking. During the course of our current audit, we coordinated 

with CMS regional office staff on open audit findings and the

status of corrective actions for fiscal year 2004 OIG audits 

completed under the interagency agreement. The staff provided 

us with a current status on open audit findings that we inquired 

about. We did not obtain updated information from the Division 

of Audit Liaison in CMS’s central office as to whether they have 

changed their audit tracking processes. 

Page 32 GAO-06-705 Medicaid Financial Management
Appendix II: Status of Prior 

Recommendations 

Recommendation Status and action(s) taken

Organizational structure

The CMS administrator should establish mechanisms to help ensure 

accountability and clarify authority and internal control responsibility 

between regional office and headquarters financial managers by 

taking the following actions. 

12. Including specific Medicaid financial oversight performance 

standards in senior managers’ performance agreements. 

13. Developing a written plan and strategy which clearly defines and 

communicates the goals of Medicaid financial oversight and 

responsibilities for implementing and sustaining improvements. 

Recommendation 12: Closed implemented 

CMS staff provided us with fiscal year 2006 performance 

agreements of CMS senior financial managers in the central 

office, and they include goals for improving financial 

management. They specifically state that managers are 

responsible for achieving the goal of reducing by 10 percent the 

amount of cumulative, questioned federal reimbursement. 

According to CMS, it will continue to hold managers 

accountable for the goal of reducing questionable 

reimbursement each fiscal year. CMS has also included 

specific goals and performance standards in regional financial 

managers’ performance plans, such as assuring completion of 

a specified number of focused financial reviews and funding

source reviews. These actions, which we consider significantly 

underway, address our prior recommendation. 

Recommendation 13: Open/reiterate 

Medicaid officials said that they have several documents that 

articulate their plans and strategy. However, CMS still lacks a 

published, comprehensive plan that describes the many 

aspects of its Medicaid financial management strategy and its 

plans for continuing and sustaining its recent improvement 

efforts. Therefore, we reiterate our prior recommendation. 

Source: GAO.

Page 33 GAO-06-705 Medicaid Financial Management
Appendix III: Comments from the Centers for Medicare & Medicaid Services Appendix III: Comments from the Centers for 

Medicare & Medicaid Services 

Page 34 GAO-06-705 Medicaid Financial Management
Appendix III: Comments from the Centers for Medicare & Medicaid Services

Page 35 GAO-06-705 Medicaid Financial Management
Appendix III: Comments from the Centers for Medicare & Medicaid Services

Page 36 GAO-06-705 Medicaid Financial Management
Appendix III: Comments from the Centers for Medicare & Medicaid Services

Page 37 GAO-06-705 Medicaid Financial Management
Appendix III: Comments from the Centers for Medicare & Medicaid Services

Page 38 GAO-06-705 Medicaid Financial Management
Appendix IV: 

A

GAO Contact and Staff 

cknowledgments 

Page 39 GAO-06-705

Appendix IV: GAO Contact and Staff 

Acknowledgments 

Linda Calbom, (202) 512-8341 or calboml@gao.gov

Staff members who made key contributions to this report include 

Kimberly Brooks (Assistant Director), Theresa Bowman, Lisa Crye, Abe 

Dymond, Diane Morris, Michelle Smith, and Edward Tanaka.

GAO Contact 

Acknowledgments 

Medicaid Financial Management
Related GAO Products Related GAO Products 

Medicaid Integrity: Implementation of New Program Provides 

Opportunities for Federal Leadership to Combat Fraud, Waste, and 

Abuse. GAO-06-578T. Washington, D.C.: March 28, 2006. 

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

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

June 28, 2005. 

Medicaid: States’ Efforts to Maximize Federal Reimbursements 

Highlight Need for Improved Federal Oversight. GAO-05-836T. 

Washington, D.C.: June 28, 2005. 

Medicaid Financing: States’ Use of Contingency-Fee Consultants to 

Maximize Federal Reimbursements Highlights Need for Improved 

Federal Oversight. GAO-05-748. Washington, D.C.: June 28, 2005. 

Health Care Fraud and Abuse Control Program: Results of Review of 

Annual Reports for Fiscal Years 2002 and 2003. GAO-05-134. 

Washington, D.C.: April 29, 2005. 

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

2005. 

Medicaid Program Integrity: State and Federal Efforts to Prevent and 

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

Medicaid: Intergovernmental Transfers Have Facilitated State 

Financing Schemes. GAO-04-574T. Washington, D.C.: March 18, 2004. 

Medicaid: Improved Federal Oversight of State Financing Schemes Is 

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

Major Management Challenges and Program Risks: Department of 

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

2003. 

Medicaid Financial Management: Better Oversight of State Claims for 

Federal Reimbursement Needed. GAO-02-300. Washington, D.C.: February 

28, 2002. 

(190136) Page 40 GAO-06-705 Medicaid Financial Management
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