United States General Accounting Office

GAO Report to the Ranking Minority Member,

Committee on Finance, U.S. Senate

November 1995 MEDICAID SECTION

1115 WAIVERS

Flexible Approach to

Approving

Demonstrations Could

Increase Federal Costs

GAO/HEHS-96-44

GAO United States

General Accounting Office

Washington, D.C. 20548

Health, Education, and

Human Services Division

B-257396 

November 8, 1995

The Honorable Daniel Patrick Moynihan

Ranking Minority Member

Committe on Finance

United States Senate

Dear Senator Moynihan:

This report, prepared at your request, examines the financing arrangements for four approved

section 1115 Medicaid demonstration waivers.

As arranged with your office, unless you publicly announce its contents earlier, we will make no

further distribution of this report until 30 days after its issue date. At that time, we will send

copies to the Secretary of Health and Human Services; the Administrator, Health Care

Financing Administration; the Director, Office of Management and Budget; and other

congressional committees. Copies of this report will also be made available to others upon

request.

If you or your staff have any questions, please call me at (202) 512-7123. Major contributors to

this report are listed in appendix VI.

Sincerely yours,

William J. Scanlon

Associate Director

Health Financing Issues
Executive Summary

Purpose In what amounts to an ambitious experiment to determine whether the

Medicaid program can add several million new beneficiaries without

increasing federal costs, the administration has approved requests for 11

demonstration waivers authorized under section 1115 of the Social

Security Act. The cost of extending Medicaid coverage to uninsured

individuals under these demonstrations is said to be offset by the

reinvestment of managed care savings. The administration has asserted

that approval for such a major restructuring hinges on budget neutrality,

that is, federal costs over 5 years must be no more than if the state had

opted to continue its smaller, prewaiver Medicaid program. (A glossary at

the end of this report defines budget concepts and other program

terminology.) In fact, some states suggest that the net result will be lower

costs—even though managed care savings are being reinvested. Eleven

more states have pending waivers and other applications are anticipated.

Because a significant number of states may eventually restructure and

operate their Medicaid programs under “comprehensive” 1115

demonstration waivers,1

 the Ranking Minority Member of the Senate

Committee on Finance asked GAO to examine the financing arrangements

for applications approved since 1992, concentrating on the potential net

impact on federal Medicaid expenditures. GAO focused its review on

section 1115 waivers in Tennessee, Florida, Oregon, and Hawaii, but also

closely monitored other approved and pending waivers.

Background To constrain rising health care costs, states are increasingly turning to

mandatory enrollment of some or all Medicaid beneficiaries in managed

care delivery plans—arrangements that limit a beneficiary’s choice of

physicians and hospitals. In many cases, these managed care plans are

prepaid a fixed amount per enrollee. This financing arrangement—known

as “capitation”—has demonstrated the ability to lower service utilization,

which in turn can hold down costs. In order to implement mandatory

managed care programs, states must obtain a waiver of certain Medicaid

requirements. The waiver authority that gives states the greatest

flexibility—it allows the executive branch to waive most federal Medicaid

requirements for demonstration projects likely to assist in promoting

program objectives—is section 1115 of the Social Security Act.

Since 1992, 22 states have asked to use this demonstration authority to

restructure their Medicaid programs. As of September 1995, 5 of the 11

1

The administration refers to section 1115 waivers that seek to restructure state Medicaid programs as

“comprehensive” to distinguish them from other, less ambitious 1115 demonstrations.

Page 2 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Executive Summary

section 1115 waivers approved by the administration were being

implemented—those for Tennessee, Hawaii, Oregon, Rhode Island, and

Minnesota. (App. III summarizes the status of all approved and pending

waivers.) The common thread present in what have been coined

comprehensive 1115 waivers—complex, sometimes controversial

proposals often tied to broader health care reforms—is (1) the switch

from a fee-for-service to a managed care approach to delivering health

benefits to traditional beneficiaries and (2) the use of anticipated savings

plus other funding streams to expand coverage to groups previously

ineligible for Medicaid. In return for extending coverage, the federal

government has increased states’ flexibility to use managed care as a

cost-containment strategy. Only a few states have applied for 1115 waivers

without also proposing to expand coverage.

The transformation of Medicaid through 1115 waivers is being facilitated

by a new federal flexibility in assessing the budget neutrality of such

demonstrations, particularly the administration’s openness to new

methods to estimate what the continuation of a state’s existing Medicaid

program would have cost. By redefining the terms of budget neutrality, the

administration has made it easier for states to demonstrate that the waiver

will cost less than the existing Medicaid program. Each state with an

approved waiver has a 5-year expenditure cap on the federal share of its

demonstration. As spelled out in the waiver agreement, yearly expenditure

targets may be exceeded, but total spending over the 5-year period of the

demonstration must be at or under the overall cap.

According to waiver applications, states are relying on a mix of funding

sources to pay for extending Medicaid to some portion of their uninsured.

Analytically, these funding sources can be grouped into two major

categories:

• redirected resources obtained by eliminating or reducing existing

programs, such as Medicaid’s Disproportionate Share Hospital Program

(DSH),2

 public health programs, or optional Medicaid coverage expansions,

and

• expected savings, primarily from different forms of managed care delivery

but also from other Medicaid reimbursement reforms or reductions in

benefits.

The extent of reliance on a particular funding source varies from state to

state and, contrary to the conventional wisdom, managed care savings

2

DSH compensates hospitals that serve the uninsured and a large Medicaid clientele.

Page 3 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Executive Summary

predominate in only one of the four waiver applications we examined. In

addition, many states collect user fees—the premiums charged to new

program enrollees. Finally, in a few cases, state funds used to subsidize

insurance programs for low-income residents are being folded into the

waiver.

Results in Brief Contrary to the administration’s assertion, the approved spending limits

for demonstration waivers in Oregon, Hawaii, and Florida are not budget

neutral and could increase federal Medicaid expenditures. Only

Tennessee’s 1115 waiver agreement should cost no more than the

continuation of its smaller, prewaiver program and, in fact, should result

in savings. Overall, the net additional federal funding is small in relation to

demonstration spending allowed under federal expenditure caps—likely

less than 3 percent. However, federal Medicaid expenditures could grow

significantly if the administration continues to show a similar flexibility in

reviewing state 1115 financing strategies. Five waivers have been approved

since Florida’s in late 1994, and the large backlog of pending waivers

includes three states with large Medicaid programs—New York, Illinois,

and Texas.

Additional federal dollars are available along with other funding sources

identified in state waiver applications. GAO believes that the potential for

additional federal funding serves as a hedge against the many challenges

and uncertainties states face in implementing these ambitious

demonstrations—including changing economic conditions, the accuracy of

cost-containment assumptions, the availability of anticipated funding

identified in waiver applications, and the lack of reliable cost data on the

uninsured. The three states in GAO’s sample currently implementing

demonstrations are already reacting to these challenges. How they adjust

to differences between expectations and actual experience in a changing

political landscape will determine whether they live within or exceed their

1115 waiver funding caps.

Principal Findings

Waiver Agreement

Spending Limits Could

Increase Federal Costs

To determine whether the four approved waivers were budget neutral, GAO

compared (1) the estimated cost of the traditional Medicaid

Page 4 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Executive Summary

program—absent the demonstration—with (2) each state’s capped budget

under its waiver funding agreement.

Projecting growth in each state’s traditional Medicaid program was

challenging because of the lack of consistently generated, state-specific

forecasts. Lacking such data, GAO relied on the only available

forecasts—the Office of Management and Budget’s national projections,

on a current services basis, of how the traditional Medicaid program

would grow over the 5-year duration of 1115 waivers.3 GAO then examined

state-specific information to identify any reasons why growth in future

expenditures for the traditional program should exceed expectations of

average growth nationwide. Using this methodology, the waiver

expenditure caps negotiated by the administration exceeded the expected

costs of continuing the traditional Medicaid program in three

states—Oregon, Hawaii, and Florida. GAO saw no support in state-specific

data to justify the differences. Only Tennessee’s 1115 demonstration is

budget neutral.

Administration officials told GAO that, since some states’ Medicaid

expenditures had been growing faster than the national average, the

budget neutrality of each proposed waiver should be evaluated

independently in order to capture these variations. However, neither the

negotiating record nor other state-specific data analyzed by GAO justified

higher than average future funding for Florida, Oregon, or Hawaii. Even in

the case of Florida, whose program had been growing faster than the

national average, the state’s own estimates showed that key factors

contributing to past growth were not expected to be sustained.

Access to Additional

Funding Has Not

Eliminated Cost Pressures

Rather than precise funding road maps, state financing strategies to pay

for expanded coverage under an 1115 waiver are outlines subject to the

test of reality. The uncertainties states face in implementing these

ambitious waivers make it difficult to predict the extent to which the

“cushion” provided by access to additional federal dollars will be needed

to supplement the redirected funds and program savings outlined in the

waiver applications. During the first year of implementation, these

uncertainties have played out in different ways for the three states in GAO’s

3

A current services forecast provides a policy-neutral benchmark that only reflects medical inflation,

normal growth in the eligible population, and changes in utilization for the entire Medicaid program.

Page 5 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Executive Summary

review that are currently implementing waivers.4 For diverse reasons, all

three states are reacting to pressures to reduce waiver expenditures.

Oregon: Unlike Tennessee, Hawaii, and Florida, coverage expansion plans

in Oregon rely predominately on managed care savings. Increased

managed care savings resulting from significantly higher enrollment in

fully capitated plans allowed the state to spend less than the federal

expenditure cap—despite the enrollment of a greater-than-estimated

number of uninsured residents. These optimistic first-year results,

however, have not dampened the concern of state officials about future

waiver costs. Under the waiver agreement, federal matching funds for

newly eligible individuals are linked to the number of traditional eligibles,

a major component of which experienced a numerical decline in 1994.

Should this decline continue, fewer new eligibles would qualify for federal

matching funds. State concerns also stem from (1) higher-than-expected

costs of new eligibles; (2) a number of new, non-health-related, spending

priorities; and (3) the impact of a 1991 tax limitation initiative. Oregon

began implementing a number of cost-containment measures such as new

eligibility rules in October 1995. The state is still waiting for the

administration to approve a reduction in benefits and premiums for newly

eligible enrollees.

Hawaii: Only Hawaii exceeded its federal waiver funding cap for the first

year—costs that must be offset in later years. Any advantage from the

current slowdown in medical inflation was offset by the surge in newly

eligible individuals who signed up for coverage under the waiver. The state

attributes this higher-than-expected enrollment to Hawaii’s current

economic slowdown and to individuals who dropped private insurance in

favor of less expensive coverage through the waiver. Hawaii is taking a

number of steps—including increasing premium contributions from new

enrollees and using stricter eligibility standards—to lower its waiver costs.

Tennessee: After maintaining open enrollment for a full year and

achieving about 80 percent of its coverage expansion goal, Tennessee

abruptly cut off enrollment as a result of a budget crisis that it attributes,

in part, to the 1115 waiver. In contrast to Hawaii, Tennessee’s first year

demonstration costs were well below its federal spending cap and on a par

with the cost of its significantly smaller prewaiver program—even though

the demonstration added several hundred thousand previously uninsured

individuals. Moreover, the state has lowered its waiver spending estimates

4

In 1994 and again earlier this year, Florida’s legislature refused to authorize implementation of the

waiver.

Page 6 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Executive Summary

for future years. According to administration officials,

lower-than-expected expenditures may be linked to problems in

identifying state matching funds. They told GAO that Tennessee’s

elimination of its DSH program could have served as a major source of

funding for coverage expansion; however, the state also discontinued the

hospital tax that served as the source of state match with the onset of

waiver implementation. Primarily because of the steep price discount that

the state required from participating managed care plans, Tennessee’s

waiver expenditure cap may have provided more money than the state

actually needed to expand coverage.

Section 1115 Medicaid waivers were approved during a period of

economic recovery and a slowdown in medical inflation. The recession of

the early 1990s coupled with rapid medical price increases serves as a

reminder of the risks posed by fixed-cost agreements in variable-cost

environments. While states have benefited from recent economic trends,

the potential for a resurgence in medical inflation, a recession, and a large

increase in the number of traditional and/or newly eligible beneficiaries

could create problems for three states currently implementing

waivers—Tennessee, Oregon, and Hawaii. Moreover, the political

environment has already changed considerably since many of these

waivers were first conceived and approved. National health care reform no

longer appears imminent, and even reform-minded states have retreated

from earlier, broader goals. A new cost-consciousness—unrelated to

current economic conditions—has emerged. Clearly, 1115 waivers will

continue to evolve, perhaps in unanticipated ways, as they are

implemented.

Recommendations GAO is making no recommendations in this report.

Agency Comments In commenting on a draft of this report, the Department of Health and

Human Services and the Office of Management and Budget disagreed with

GAO’s conclusion that the waiver funding caps for Oregon, Hawaii, and

Florida are not budget neutral. GAO continues to believe that the

administration’s waiver funding caps for these states may result in

increased federal spending. A detailed discussion of the administration’s

comments and GAO’s response appears in chapter 5. The administration’s

comments are reprinted in appendix V.

Page 7 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Contents

Executive Summary 2

Chapter 1 

Introduction

12

Medicaid Programs Restructured Under Redefined Budget

Neutrality Policy

13

Waiver Designs Often Reflect State Context and Health Reform

Goals

23

Financing of Waivers Is Most Contentious Issue 24

Objectives, Scope, and Methodology 27

Chapter 2 

Theory Behind

Expanding Medicaid

Coverage Without

Increasing Program

Expenditures

28

Planned Sources of Funding for 1115 Medicaid Waivers 28

Funds From DSH and Other Programs Play Major Role 30

Savings Anticipated, Primarily From Managed Care 31

Newly Insured Asked to Contribute Toward Costs 34

Two States Fold Subsidized Insurance Programs for Low-Income

Residents Into Waivers

35

Chapter 3 

Three of Four

Demonstration

Waivers Are

Potentially Not

Budget Neutral

37

Spending Limits Inconsistent Under Four Approved Waivers 37

Nationwide Medicaid Expenditure Forecasts Used to Assess

Budget Neutrality

41

State Variation Does Not Justify Waiver Agreement Expenditure

Caps

50

Three Waivers Provide Access to Significant Additional Funding 51

Chapter 4 

Despite Lower

Inflation, State

Demonstrations Face

Cost Pressures

53

Oregon: First-Year Enrollment and Cost Experience 53

Hawaii: First-Year Enrollment and Cost Experience 57

Tennessee: First-Year Enrollment and Cost Experience 58

Implementing Fixed-Cost Agreements in a Variable-Cost

Environment

60

Chapter 5 

Conclusions and

Agency Comments

62

Agency Comments 63

Page 8 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Contents

Appendixes Appendix I: Objectives, Scope, and Methodology 66

Appendix II: Overview of Medicaid 72

Appendix III: Summary of Approved and Pending 1115 Medicaid

Demonstration Waivers Submitted Since 1992

75

Appendix IV: Differing State Health Reform Contexts 76

Appendix V: Comments From the Department of Health and

Human Services

80

Appendix VI: Major Contributors to This Report 85

Glossary 86

Tables Table 1.1: Comparison of Managed Care Flexibility Available

Under 1915(b) Versus 1115 Waivers

17

Table 1.2: Coverage Expansion Goals and Cost-Sharing

Arrangements for Seven Approved 1115 Demonstration Waivers

19

Table 1.3: Methodology for Enforcing Budget Neutrality

Expenditure Limits

26

Table 2.1: State Projections of 5-Year Savings Under 1115 Waivers 28

Table 2.2: Planned Sources of Funding for Expanded Coverage

Over the 5-Year Terms of 1115 Demonstrations

29

Table 2.3: DSH Allotment as a Percentage of Medicaid

Expenditures in Fiscal Year 1993 for Four Waiver States

30

Table 2.4: Percentage Enrollment in Different Types of Managed

Care Delivery Systems

33

Table 2.5: Hypothetical Examples of Premium Allocation

Agreements Under Approved Waivers

35

Table 3.1: Allowed Growth Rates Under Four Approved 1115

Waiver Agreements

38

Table 3.2: Comparison of Florida’s Expansion Cost Estimates and

Budget Neutral Growth in Without-Waiver Program

46

Table 3.3: Recent Medicaid Spending Trends in Four Waiver

States

50

Table 3.4: Comparison of Four Section 1115 Waiver Agreement

Expenditure Caps and Projected Without-Waiver Spending

52

Table 4.1: Comparison of 1994 Actual and Estimated Costs and

Enrollment Under Oregon’s 1115 Waiver

55

Table 4.2 Comparison of Estimated versus Actual PPPM Costs for

Traditional and Newly Eligible Beneficiaries Under Oregon’s 1115

Waiver

55

Page 9 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Contents

Table 4.3: Comparison of 1994 Actual and Estimated Enrollment

Under Hawaii’s 1115 Waiver

58

Table 4.4: Comparison of Enrollment/Expenditures Under

Tennessee’s Prewaiver Medicaid Program and the 1115

Demonstration

59

Table 4.5: Comparison of Tennessee’s Waiver Agreement

Spending Limits, First-Year Costs, and Revised Expenditure

Projections

59

Table I.1: Comparison of Tennessee Waiver Agreement Spending

Cap and Projected Without-Waiver Spending—Year by Year

68

Table I.2: Comparison of Florida Waiver Spending Agreement

Cap and Projected Without-Waiver Spending—Year by Year

69

Table I.3: Comparison of Oregon Waiver Spending Agreement

Cap and Projected Without-Waiver Spending—Year by Year

70

Table I.4: Comparison of Hawaii Waiver Agreement and Projected

Without-Waiver Spending—Year by Year

71

Figures Figure 3.1: OMB Projections of Medicaid Current Services

Outlays

40

Figure 3.2: Tennessee: Comparison of Waiver Agreement

Spending Cap and Projected Spending Without Waiver

43

Figure 3.3: Florida: Comparison of Estimated Waiver Agreement

Spending Cap and Projected Spending Without Waiver

45

Figure 3.4: Oregon: Comparison of Estimated Waiver Agreement

Spending Cap and Projected Spending Without Waiver

47

Figure 3.5: Hawaii: Comparison of Estimated Waiver Agreement

Spending Cap and Projected Spending Without Waiver

48

Figure 3.6: Impact of Including “Hypothetical” Populations in

Hawaii’s Program Baseline

49

Figure II.1: Growth in Medicaid Expenditures, 1985-1993 73

Page 10 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Contents

Abbreviations

CPI Consumer Price Index

DSH Disproportionate Share Hospital Program

ERISA Employee Retirement Income Security Act of 1974

HCFA Health Care Financing Administration

HHS Department of Health and Human Services

HMO health maintenance organization

OMB Office of Management and Budget

PCCM primary care case management

PPO preferred provider organization

PPPM per person per month

SFY state fiscal year

Page 11 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Chapter 1 

Introduction

Financed jointly by the federal government and states, Medicaid is the

nation’s health care lifeline for two statutorily defined groups of

low-income residents—families, primarily women and children; and the

aged, blind, and disabled.5

 In reality, Medicaid is not 1, but rather 56

separate programs that differ dramatically across states.6

 While federal

statute mandates who is eligible for coverage and the broad categories of

services that must be provided, each participating state designs and

administers its own program by (1) setting certain income and asset

eligibility requirements, (2) selecting which optional groups and services

to cover, and (3) determining the scope of mandatory and optional

services. As a result of this flexibility, Medicaid is not available to

everyone who is poor. In 1993, Medicaid provided health care coverage to

less than half of those with incomes below the poverty level.7

 The Health

Care Financing Administration (HCFA) within the Department of Health

and Human Services (HHS) monitors each state program for compliance

with federal regulations. (App. II contains more background information

on the Medicaid program.)

The $130 billion Medicaid program is at a crossroads. Between 1985 and

1993, Medicaid costs tripled and the number of beneficiaries increased by

over 50 percent. Current projections suggest that program costs will

double over the next 5 to 7 years. To constrain rising health care costs,

states are increasingly turning to mandatory enrollment of some or all

Medicaid beneficiaries in managed care delivery plans—arrangements that

limit a beneficiary’s choice of physicians and hospitals. In many cases,

these managed care plans are prepaid a fixed amount per enrollee. This

financing arrangement has demonstrated the ability to lower service

utilization, which in turn can hold down costs.

In order to implement mandatory managed care programs, states must

obtain a waiver of certain Medicaid requirements. The waiver authority

that gives states the greatest flexibility is section 1115 of the Social

5

The federal government matches state expenditures according to a prescribed formula based on state

per capita income, providing, on average, 58 cents for every dollar spent. Federal matching for

individual states varies from a minimum of 50 percent to a maximum of 83 percent of total Medicaid

costs.

6

All 50 states plus the District of Columbia, American Samoa, Guam, the Northern Mariana Islands,

Puerto Rico, and the Virgin Islands have Medicaid programs.

7

Throughout this report, “poverty level” refers to the federal poverty guidelines, which are used to

establish eligibility for certain federal assistance programs. The guidelines are updated annually to

reflect changes in the cost of living and vary according to family size. Guidelines are uniform across

the continental United States and slightly higher for Alaska and Hawaii. For example, in 1994 the

poverty level for a family of four in the continental United States was $14,800, while in Hawaii it was

$17,020.

Page 12 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Chapter 1 

Introduction

Security Act. Section 1115 allows the executive branch to waive most

federal Medicaid requirements for demonstration projects likely to assist

in promoting program objectives.8

 Since 1992, 22 states have asked to use

this demonstration authority to restructure their Medicaid programs. The

common thread present in what have been termed “comprehensive” 1115

demonstration waivers is (1) the switch from a fee-for-service to a

managed care approach to delivering health benefits and (2) the use of

anticipated savings plus other funding streams to expand coverage to

groups previously ineligible for Medicaid.

Medicaid Programs

Restructured Under

Redefined Budget

Neutrality Policy

Eleven states with 1115 waivers approved since 1993 have undertaken an

ambitious experiment to demonstrate that the Medicaid program can

actually save money while simultaneously expanding coverage.9

 The

administration has entered into 5-year budget commitments that allow

each state to reinvest managed care savings and redirect other funds in

order to expand coverage to currently uninsured individuals. Compared to

expenditure trends for the predemonstration program, states suggest that

the net result of waivers will be lower costs—even though managed care

savings are being reinvested. Eleven more waivers are pending, and all but

a few applicants are pursuing a similar managed care

cost-containment/coverage expansion strategy. Only Illinois, Oklahoma,

and Kentucky (the state’s 1995 demonstration application) propose using

1115 waiver authority to reduce both state and federal Medicaid

expenditures without expanding coverage.10

The use of 1115 waivers to restructure state Medicaid programs has been

facilitated by a new federal flexibility in assessing the budget neutrality of

such demonstrations—particularly, the administration’s avowed openness

to “new methodologies” to estimate what the continuation of a state’s

existing Medicaid program would have cost. By redefining the terms of

budget neutrality, the administration has made it easier for states to

demonstrate that waivers will cost less than their existing Medicaid

programs. The administration asserts, nonetheless, that all approved 1115

8

Demonstration projects have made significant contributions to the development of Medicaid policy,

including early experiments with prospective payment for inpatient care and school-based services for

young children.

9

In 1982, Arizona was granted an 1115 waiver to initiate a statewide managed care program. Previously,

the state had not participated in Medicaid. For a description of Arizona’s Medicaid program, see

Arizona Medicaid: Competition Among Managed Care Plans Lowers Program Costs (GAO/HEHS-96-2,

Oct. 4, 1995).

10Kentucky’s 1993 demonstration application was one of the first to be approved. Because of the state

legislature’s concern about the adequacy of funding to extend eligibility to certain uninsured residents,

the state submitted a new 1115 waiver application in 1995 that omits any coverage expansion.

Page 13 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Chapter 1 

Introduction

waivers are budget neutral and that the demonstration authority is not

being used to expand entitlement spending.

Oregon First to Request

1115 Medicaid

Demonstration Waiver

Oregon’s 1991 application—a major component of a broader reform of its

health care system—was the first request since 1982 to operate a

comprehensive, statewide demonstration program. After a year of review,

the Bush administration rejected the application on the grounds that the

state’s proposed benefits package might violate the Americans With

Disabilities Act. A report prepared for the National Governors’ Association

criticized the handling of Oregon’s application, noting that the review

process did not give due weight to the state role in Medicaid, had a

“chilling” effect on innovative proposals, and imposed budget neutrality

requirements that were too narrow.11 The Clinton administration

subsequently announced plans to streamline and expedite the review

process for 1115 waivers.

Oregon revised and resubmitted its waiver application in late 1992 and the

following March became the first state in over 10 years to obtain approval

for a comprehensive 1115 demonstration. Since then, 10 additional waivers

have been approved. Another 11 states have applications pending, and

others have expressed interest in submitting requests for 1115 waivers.

States with approved and pending waivers account for about 49 percent of

the nation’s Medicaid beneficiaries and 52 percent of total Medicaid

expenditures.12 As of July 1995, however, only five states—Oregon,

Hawaii, Tennessee, Rhode Island, and Minnesota—had begun

implementation. Appendix III summarizes the status of all approved and

pending comprehensive 1115 demonstrations submitted since 1992.

11John Luehrs, Flexibility and Waiver Authority for Health Care Reform: A Primer for States, Health

Policy Studies, Center for Policy Research, National Governors’ Association (Washington, D.C.: 1992).

12Throughout this report, Medicaid beneficiary/recipient statistics include all enrolled individuals in the

50 states and the District of Columbia regardless of whether they received services during the year.

Page 14 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Chapter 1 

Introduction

1115 Waivers Remove

Roadblocks to Managed

Care

Requirements intended to preserve quality by protecting a Medicaid

beneficiary’s freedom to choose a provider have limited states’ ability to

mandate enrollment in HMO-style managed care.13 HMO-style health plans

are prepaid a fixed amount based on the number of enrollees rather than

reimbursed after each service is rendered. Such prepayment on a per

capita basis is often referred to as “capitation.” A convergence of

trends—spiraling Medicaid expenditures coupled with a stronger interest

on the part of mainstream HMOs in serving the Medicaid population—has

given impetus to as well as facilitated the adoption of a managed care

cost-containment strategy by states. And rather than turning to physician

gatekeeper arrangements that dominated past managed care experiments,

many states are using the flexibility gained under 1115 Medicaid waivers to

adopt capitated alternatives.

Reacting to quality-of-care, marketing, and other problems that surfaced in

a number of Medicaid managed care programs, the Congress enacted

provisions in 1976 with the general goal of encouraging HMOs to provide

public clients a quality of care comparable to that available to private

clients.14 At the time, HMOs were the prevalent form of managed care. One

provision discouraged the creation of HMOs serving only Medicaid

beneficiaries by requiring that at least a certain percentage of the patients

be privately insured. The participation of private-paying patients, who

presumably have a choice of health plans, was instituted as a proxy for

quality. A second provision added in 1981 allows recipients to terminate

enrollment in an HMO at any time. From the beneficiary’s perspective, these

provisions offer protection against enrollment in an HMO seeking excessive

profit at the expense of quality. From the HMO’s perspective, however,

unrestricted freedom to disenroll makes it difficult to plan financially and

13Though no commonly accepted definition exists for the term “managed care,” a number of features

are typically associated with it: (1) provider networks with explicit criteria for selection, (2) alternative

payment methods and rates that often shift some financial risk to providers, and (3) utilization

controls over hospital and specialist physician services. Despite the confusing nomenclature used to

distinguish a variety of managed care plans—HMO, PPO, PCCM—most include one or more of these

common cost-control features. Health maintenance organizations (HMO), the most tightly controlled

type of managed care plans, require patients to use affiliated physicians who may be salaried, paid on a

per capita basis (often referred to as “capitated”), or reimbursed for each service. Typically, a patient’s

care, especially referrals to specialists and hospitalization, is coordinated by a primary care

physician—often called a “gatekeeper.” Preferred provider organizations (PPO) provide enrollees with

a financial incentive—lower cost-sharing (co-payments)—to receive care from a network of providers

that are normally reimbursed at a discounted rate. Finally, many state Medicaid programs have

conducted experiments using a primary care case management (PCCM) approach in which physician

gatekeepers must authorize a patient to see a specialist or obtain hospital care. Gatekeeper physicians

may be partially capitated or paid for each service delivered. For a description of the evolution and use

of the term managed care, see Managed Health Care: Effect on Employers’ Costs Difficult to Measure

(GAO/HRD-94-3, Oct. 19, 1993).

14These provisions were incorporated in subsection (m) of the Social Security Act, which was added to

section 1903 (42 U.S.C. 1396b(m)).

Page 15 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Chapter 1 

Introduction

therefore renders the enrollment of Medicaid recipients less attractive.

This provision added to the hesitancy of many mainstream HMOs to

participate in Medicaid, further restricting states’ ability to experiment

with fully capitated health plans.15

In 1993, about 4.8 million beneficiaries, or about 12 percent of the

Medicaid population, were enrolled in some type of managed care.16

Though a number of voluntary and mandatory managed care options are

available to states, the enrollment of Medicaid beneficiaries has lagged

behind national trends. Without an 1115 waiver, states essentially have

three managed care options:

• voluntary enrollment in an HMO, in which case the beneficiary must also

have a choice of obtaining services on a fee-for-service basis and be

allowed to disenroll at will;

• mandatory enrollment in an HMO, provided the beneficiary can choose

from among a number of competing HMOs, with disenrollment allowed on a

monthly basis (or every 6 months if an HMO meets certain federal

requirements); and

• voluntary or mandatory enrollment in a physician gatekeeper system in

which either the physician’s charges are partially capitated or the

physician is reimbursed under fee-for-service.

The last two options require waivers of Medicaid provisions that have

been widely provided under section 1915(b) of the Social Security Act. As

of July 1994, 37 states operated 1915(b) waiver programs. These programs

were primarily substate (that is, in a limited geographic area), voluntary,

and involved physician gatekeepers rather than HMOs. Until 1993, only two

states—Arizona and Minnesota—operated mandatory HMO managed care

programs under the authority of an 1115 waiver.17 Table 1.1 delineates the

additional flexibility available under an 1115 waiver compared with

1915(b) authority.

15Other factors that dissuaded HMOs from participating in the Medicaid program included (1) inability

to offer incentives, such as lower out-of-pocket costs or better benefits, to encourage beneficiaries to

enroll; (2) lack of experience in marketing to individuals as opposed to large employers; and (3) a

widespread perception that Medicaid beneficiaries were costly and had difficulty adjusting to HMO

restrictions.

16This percentage is calculated using the number of individuals enrolled in Medicaid. Occasionally, a

slightly higher percentage is reported that is based only on beneficiaries who actually receive services

during the year.

17As noted earlier, Arizona’s program operated statewide. In contrast, Minnesota’s 1115 waiver

primarily covered the urban counties surrounding Minneapolis.

Page 16 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Chapter 1 

Introduction

Table 1.1: Comparison of Managed

Care Flexibility Available Under

1915(b) Versus 1115 Waivers

Section 1915(b) program waiversa Section 1115 demonstration waivers

HMOs must still meet federal requirement

for more than 25 percent private enrollment

HMOs may enroll Medicaid patients

exclusively

Full range of mandatory services must be

offered

Benefit package may be modifiedb

Enrollment “lock-in” limited to 1 monthc Enrollment “lock-in” may be extended to

12 months

No restrictions on access to family planning

providers

Access to family planning providers may

be restricted

aWhen originally enacted in 1981, section 1915(b) expressly allowed waiver of section 1903(m)

HMO provisions in the Social Security Act. The following year, the law was amended to eliminate

the authority to waive these provisions.

bTo date, only Oregon has been permitted to modify the benefit package for traditional Medicaid

eligibles. Other states have been permitted to offer a modified package only to those newly

eligible under the demonstration.

cThe lock-in is 6 months for an HMO meeting certain federal qualifications.

1115 Coverage Expansion

Goals and State Medicaid

Baselines Vary

Though all approved 1115 waivers expand eligibility, the nature and extent

of coverage expansion varies. Waivers use income standards to define and,

in effect, limit who is eligible, but states further restrict the number of

individuals that can actually obtain coverage through explicit enrollment

caps, other barriers, and even premiums. Because of greater than

anticipated enrollment, several states are taking additional steps to limit

the number applying for coverage.

Most states are adding groups who were previously ineligible for

Medicaid—single adults and childless couples. However, it is important to

recognize that some categories of newly eligible individuals in one state

may already be enrolled in Medicaid in another because of differences in

the qualifying income levels established by states for families and optional

coverage expansions allowed by statute.18 Moreover, states may have

previously provided health coverage to some new eligibles outside of

Medicaid—that is, through state-funded programs. For example,

Kentucky’s planned expansion under its now suspended 1993 waiver

includes both previously ineligible individuals and individuals who could

have been included in Medicaid at state option. In Rhode Island, Hawaii,

18One such option is section 1902(r)(2) of the Social Security Act, 42 U.S.C. 1396(b)(r)(2), which

enables states to liberalize financial criteria for certain individuals not receiving cash assistance.

Women and children and the aged, blind, and disabled may qualify for Medicaid coverage in this way.

No precise upper limit on income exists under this option. Thus, at least one state has established

financial criteria sufficiently liberal to cover individuals with incomes up to 300 percent of the federal

poverty level.

Page 17 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Chapter 1 

Introduction

and Minnesota the expansions either are limited to or include individuals

who could have been Medicaid- eligible at state option. Both Hawaii and

Minnesota offered state-funded coverage to many included in their

waivers.19

Table 1.2 summarizes the coverage expansion goals of seven states with

approved 1115 waivers. Generally, expansion goals are stated in terms of

the number of newly eligible individuals expected to be covered under the

waiver at the end of the 5-year period of each demonstration. Enrollment

in year 1 may be less than the 5-year enrollment goal, since states typically

anticipate reaching “full enrollment” gradually. State goals should be

viewed as targets subject to a number of constraints, especially financing.

Some waivers indicate that the state will limit enrollment if funding proves

to be inadequate. At least one state, Tennessee, has already done so.

19These programs are the General Assistance and State Health Insurance Programs in Hawaii and

MinnesotaCare in Minnesota.

Page 18 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Chapter 1 

Introduction

Table 1.2: Coverage Expansion Goals and Cost-Sharing Arrangements for Seven Approved 1115 Demonstration Waivers

Implemented

Not implemented

Tennessee Oregon Hawaii

Rhode

Island Minnesota Kentucky Florida

Poverty level criterion (no

individual/family with income

above this limit qualifies for

coverage)a

No upper

limit

100% of

poverty level

300% of

poverty level

250% of

poverty level

275% of

poverty level

(children

only)

100% of

poverty level

250% of

poverty level

Estimated enrollment, year 5 500,000 96,400b 77,000 7,000 135,000 201,000 1,100,000

Enrollment, year 1 400,425

(actual,

7/7/95)

69,666

(average,

12/31/94)

63,500

(actual, 7/95)

716 (actual,

5/31/95)

47,000

(actual, 7/95)

Suspended

by state

145,558

(estimated)

Percentage of poverty level at

which premium payments

begin

100% of

poverty

levelc

d 100% of

poverty levele

185% of

poverty levelf

70% of

poverty level

No premiums Enrollee with

any income

must pay a

premium

Income level at which enrollee

pays full premium

400% of

poverty

levelc

d 201% of

poverty levele

Over 250%

of poverty

level

Over 275%

of poverty

level

No premiums Over 250%

of poverty

level

Average monthly premium for

a family of 4 at 150% of

poverty level

$27.35 d $140e No premium

at this

poverty levelf

$36 No premiums Approximately

$21g

aFor example, in Oregon a family of four whose income exceeds $14,800 would not be eligible for

coverage under the waiver, while in Minnesota the income standard is $40,700.

bBecause of the employer mandate, the state expected the number of new eligibles to decline to

this lower level by the fifth year of the waiver as some low-income individuals shift to private

insurance.

cParticipants are also expected to contribute co-payments for most services and annual

deductibles up to a maximum.

dIn June 1995, Oregon requested HCFA approval to begin charging premiums as of October. As

of late October, HCFA officials had not responded to this request. Under the proposed changes,

all new eligibles are expected to pay a premium. The maximum premium for a family of four or

more at 100 percent of the poverty level would be $28.

eHawaii implemented these cost-sharing arrangements on August 1, 1995. During the preceding

12 months, out-of-pocket costs for new eligibles were lower: (1) only individuals at and above

133 percent of the poverty level were required to pay premiums, (2) individuals at or above

296 percent of the poverty level were required to pay the full premium, and (3) the monthly

premium payment for a family of four was only $51.40.

f

Rhode Island offers two cost-sharing options—a premium and a point-of-service co-payment. To

date, most enrollees have selected the point-of-service co-payment option. According to a state

official, the two options are designed to be actuarially equivalent, that is, the net cost to enrollees

is the same. Premium shares for demonstration eligibles are stratified by age and represent

3 percent of the total premium amount. A family of four consisting of a mother, one infant, and two

children between 185 and 250 percent of the poverty level would pay a monthly premium of about

$14.50.

gThe total premium is actually $42, but Florida assumes that enrollees and their employers will

split the cost. An enrollee would be responsible for any portion of the total premium not paid by

the employer.

Page 19 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Chapter 1 

Introduction

At one end of the expansion continuum, Tennessee’s waiver program has

no eligibility income limit and requires only those enrollees above 400

percent of the poverty level to pay the full premium. Tennessee set an

original enrollment cap of 500,000 on new eligibles and excluded

individuals who were insured before a certain cutoff date to forestall a

migration from private insurance.20 The state lowered its cap in December

1994, in effect limiting the expansion to the approximately 400,000

previously uninsured individuals already enrolled.21 In contrast, Oregon’s

expansion goals are less ambitious because, in part, the employer mandate

was expected to cover low-income workers. The waiver expands eligibility

up to 100 percent of the poverty level, requires no premiums from

participants, and has no explicit enrollment cap. In order to address

budgetary constraints, the legislature enacted several changes that the

state began implementing on October 1, 1995. However, HCFA has yet to

approve Oregon’s request to require premiums of some newly eligible

participants.

Some 1115 waivers, such as Hawaii’s, target individuals who were already

covered by state-funded expansion programs outside of Medicaid.22

Consequently, Hawaii did not anticipate much additional enrollment as a

result of its waiver. Unlike Hawaii, Minnesota’s waiver application did not

include single adults and childless couples covered under state-funded

MinnesotaCare. State officials told us that requesting a federal match for

this group would have created a budget neutrality problem because of the

cost. Instead, the approved waiver shifts children covered under

MinnesotaCare into Medicaid—a group that could have been included in

the program at state option. Finally, Rhode Island’s expansion group is

limited to pregnant women and children who could also have been

covered at state option without an 1115 waiver.

20Tennessee established an overall cap on program participation—1.3 million the first year (1 million

traditional Medicaid recipients and 300,000 previously uninsured individuals) and 1.5 million in

subsequent years (1 million traditional recipients and 500,000 previously uninsured individuals). In

effect, however, the cap only applied to the enrollment of the previously uninsured, since traditional

Medicaid recipients and those whose medical conditions make them uninsurable would continue to be

enrolled if the overall cap is reached.

21On December 31, 1994, Tennessee closed enrollment to previously uninsured individuals who do not

qualify for Medicaid or are not considered uninsurable. Applications pending at that time were

processed.

22Some individuals covered by Hawaii’s state-funded expansion had been ineligible for Medicaid, while

others could have been included at state option.

Page 20 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Chapter 1 

Introduction

Treatment of Low-Income

Populations Under Waivers

Is Controversial

Embedded in many comprehensive 1115 demonstrations is a controversial

philosophical shift in the way publicly supported health care is provided to

the poor—a shift (1) inherent in the adoption of managed care delivery

systems and (2) visible in the treatment of those newly eligible under the

demonstration. The cumulative effect of these changes is to place more

responsibility on the individual beneficiary. Advocacy groups for the poor23

and waiver states disagree on the extent to which low-income

beneficiaries can shoulder these responsibilities.

Advocacy groups typically see Medicaid beneficiaries, as well as many of

the working poor to whom coverage is being extended, as a vulnerable,

high-risk, and sicker segment of the population. They are concerned about

the ability of the poor to access services in a managed care system. As

noted earlier, some critics of managed care argue that it creates a

“perverse incentive” to deliver fewer or less costly services than may be

needed. Advocacy groups also worry that managed care will (1) further

reduce the historically low Medicaid reimbursement levels, (2) diminish

quality of care, and (3) curtail access to providers that have traditionally

served the poor. Finally, they see a disincentive for the poor to participate

in waiver programs when premiums, though subsidized, are high relative

to income. States, on the other hand, point out that the waivers require

them to implement significant quality assurance programs such as

collecting and analyzing encounter data and conducting annual

satisfaction surveys. They contend that access and quality were never

optimal under a fee-for-service delivery system in which choice was

guaranteed but not necessarily available and high emergency room use

was an underlying symptom of access problems. Finally, states generally

see employment as a proxy for health and evidence for distinguishing

between the newly eligible working poor and the more vulnerable

beneficiaries typically enrolled in Medicaid.

The “mainstreaming” of new eligibles—that is, the attempt to treat them as

if they were purchasers of private insurance—is perhaps the hallmark of

most state 1115 demonstrations.24 For the newly insured, states have

attempted to break Medicaid’s psychological link with welfare by

23In June 1994, the National Association of Community Health Centers filed a lawsuit to stop the

implementation of comprehensive 1115 demonstrations. The Association noted that it was acting to

ensure that the rights of vulnerable populations are protected—not to thwart state efforts to improve

health care delivery. In a press release announcing the lawsuit, the Association argued that

beneficiaries were being “forced to enroll in managed care plans that are under no compulsion to meet

federal safeguards designed to ensure access, services, and quality control.”

24Since 1986, states have had greater leeway in adopting a streamlined eligibility process for Medicaid

recipients who do not receive cash assistance. Most states have adopted one or more of the available

alternatives.

Page 21 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Chapter 1 

Introduction

establishing eligibility criteria and enrollment mechanisms distinct from

those that apply to traditional beneficiaries, many of whom qualify for

Medicaid by virtue of receiving cash assistance. For example, most

waivers eliminate the asset test, often criticized as intrusive and expensive

to administer, and rely instead on a gross income test.25 Moreover, rather

than the frequent redeterminations of eligibility associated with Medicaid,

many newly eligible individuals are enrolled for periods ranging from 6 to

12 months. In some states, enrollment of new eligibles is not handled by

the agency that administers Medicaid. In fact, Florida plans to hand this

task over to insurance agents—further underscoring the similarity to a

private insurance product. In general, application forms are simpler and in

some states can even be mailed. Newly eligible individuals usually receive

the full acute care benefit package available to traditional Medicaid

recipients. Only in the case of Florida is the benefit package more

restrictive. Finally, many states require individuals with incomes above the

poverty level to contribute toward the cost of health care coverage by

charging premiums, co-payments, and deductibles.

For the traditional Medicaid population, the major change associated with

1115 waivers is the wholesale movement from fee-for-service to some type

of managed care—even in rural areas and, often, even for those who are

aged, blind, or disabled.26 For some, such as low-income families in

Oregon and Minnesota who were already enrolled in mandatory managed

care programs, the change may be imperceptible. Under most 1115

waivers, eligibility requirements are unchanged and benefits remain the

same or are more generous. For example, Tennessee lifted service

restrictions on its Medicaid benefit package. Only Oregon altered benefits

to help finance coverage expansion. The redefined package, commonly

25Certain of these changes result in the loss of coverage for a small number of individuals who would

qualify for Medicaid were the demonstration not in place. For a more extensive discussion of the

impact of eliminating the asset test, see Sara Rosenbaum and Julie Darnell, Medicaid Section 1115

Demonstration Waivers: Approved and Proposed Activities as of November 1994, Center for Health

Policy Research, The George Washington University (Washington, D.C.: Nov. 1994), p. 3.

26Tennessee and Florida include the aged, blind, and disabled in their transition from fee-for-service to

managed care. HCFA approved Oregon’s request to add this population to the state’s waiver program

beginning in January 1995. Hawaii anticipates seeking HCFA approval to include these populations at a

later date.

Page 22 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Chapter 1 

Introduction

known as the “prioritized list,” eliminates some costly health services

while adding a broad array of preventive care.27

Waiver Designs Often

Reflect State Context

and Health Reform

Goals

A notable feature of the growing number of 1115 waivers is their divergent

techniques for using Medicaid as a springboard to achieve some degree of

reform in state health care systems. Numerous states that have submitted

waiver applications are recognized leaders representing diverse

approaches to health care reform. Though many waivers were conceived

when national reform appeared imminent, the recent retrenchment from

broader reform goals suggests that Medicaid waivers have become a more

important component of state health care reform. Appendix IV compares

several states across a range of indices that are relevant to understanding

the diversity evident in waiver designs.

The 1115 waiver is health care reform in Tennessee. The state’s emphasis

on managed care promises to increase penetration by that delivery system

in a region long resistant to such a change while at the same time

significantly reducing the number of uninsured. The success of this policy

hinges on the adoption of a stringent cost-containment strategy with

regard to health care financed through the waiver.

In contrast to Tennessee’s nascent reform program, Florida’s as yet

unimplemented waiver represents a logical progression from earlier small

market reforms intended to provide access to affordable insurance for the

working poor. The state hopes to use its waiver to achieve a dramatic

enrollment expansion in the state’s voluntary, small business-oriented

purchasing cooperatives and a significant reduction in its estimated

24-percent uninsured rate. Florida stands alone in the extent to which it

distinguishes between traditional and newly eligible Medicaid recipients.

While the former are required to choose between different forms of

managed care, newly eligible recipients may select any health plan offered

by state-supported purchasing cooperatives with the sole proviso that the

enrollee is responsible for any difference between the subsidy and the plan

premium. Florida’s 1992 health reform legislation established a goal of

27The process for establishing the revised benefit package was controversial because the state

developed a method to rank, or prioritize, services in descending order from most to least useful.

Independent actuaries set cost estimates for individual services on the list. Each legislative session,

state legislators “draw the line” according to the amount of funds appropriated for the program,

thereby defining the list of available services. State officials believe the use of the prioritized list will

ensure continuous coverage for demonstration enrollees despite funding fluctuations, which states

historically remedy by eliminating coverage for optional groups and services. Examples of services not

included are aggressive cancer treatment that will not result in a 5-percent probability of a 5-year

survival (hospice care, comfort care, and treatment of symptoms are still covered); medical treatment

for a sore throat or diaper rash; and cosmetic services.

Page 23 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Chapter 1 

Introduction

universal coverage, and the legislature promised to revisit the choice of a

voluntary over a mandatory approach unless there was a significant

reduction in the number of uninsured.

In Minnesota, Oregon, and Hawaii, the waiver is only one element of a

much more ambitious reform agenda—an agenda that some state officials

believe has been brought into question since the 1994 health care debate.

All three states have universal coverage as a goal. Hawaii already has a

limited exemption from the requirements of the Employee Retirement

Income Security Act of 1974 (ERISA)28 that allows it to require employers to

offer health insurance to their workers. Oregon’s Medicaid waiver is also

built around an ERISA exemption to permit enactment of an employer

mandate. Obtaining that exemption is now considered unlikely. In

contrast, Minnesota had been attempting to finance universal coverage

with an individual mandate, though state officials told us that this

approach is no longer considered a possibility. Both Hawaii and Minnesota

have relatively small uninsured populations and, prior to the 1115

Medicaid waiver, had already taken steps to address this problem through

the establishment of state-funded coverage expansions. All three states

have significant managed care penetration. Moreover, Oregon and

Minnesota have a decade of experience with Medicaid managed care.

Financing of Waivers

Is Most Contentious

Issue

An important element of the administration’s commitment to streamline

and expedite the review of 1115 waivers was the promise to maintain the

principle of waiver budget neutrality “more flexibly than has been the case

in the past.” Despite this commitment, a number of factors have

contributed to a lengthening of the process, including extensive

negotiations over financing.29 In fact, both administration and state

officials told us that budget neutrality is often the most contentious issue.

28Public Law 93-406, 88 Stat. 829 (classified as amended at 29 U.S.C. 1001 et seq.). ERISA prevents

states from mandating that employers provide health benefits. Concurrent with the original passage of

ERISA, Hawaii enacted comprehensive health reform requiring all employers to provide full-time

employees a standard health package and pay for a substantial portion of the premium. Some

dependents, part-time workers, and certain other individuals were not covered by the mandate. After

several large employers successfully argued that ERISA precluded such a mandate, the Congress

grandfathered Hawaii’s statute by granting an exception to ERISA requirements.

29Five waivers were submitted between November 1992 and mid-1993 and each was approved before

the end of 1993. The shortest approval took 3 months and the longest 7 months. In 1994, however, only

one of nine waivers pending was approved for implementation. Additional factors that have

lengthened the review process include (1) the complexity of and variation found in state applications,

(2) concerns raised over the rapid approval and implementation of Tennessee’s waiver, and (3) the

growing backlog of waivers submitted.

Page 24 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Chapter 1 

Introduction

Though a policy of budget neutrality has been in effect since the early

1980s, previous 1115 Medicaid demonstrations were usually small-scale

experiments targeted at specific populations (for example, pregnant

drug-users on Medicaid) or implemented in a limited geographic area.30 As

a result, the potential impact on state and federal expenditures was more

circumscribed and the task of devising a cap to ensure cost neutrality was

less challenging.31 Oregon’s 1991 waiver application was the first of a new

breed of “comprehensive” 1115 demonstrations—complex proposals that

were sometimes controversial and often tied to broader health reform

agendas. HCFA officials told us that the number, scope, and complexity of

such comprehensive demonstrations in effect elevated the importance of

budget neutrality while making it more difficult to evaluate and enforce.

In a memo preceding promulgation of a more flexible approach to budget

neutrality, HHS officials recognized the incentive for states to shift costs to

the federal government and the need to constrain such behavior.

Nonetheless, they outlined several arguments for a less strict approach.

For example, they pointed out that the federal government might want to

(1) share in the risks and costs of testing innovations that were ultimately

in its own interest; (2) set the stage for health reform by supporting

changes that should not wait even if they are somewhat more costly; and,

finally, (3) provide some fiscal relief to states overburdened by the rising

number of uninsured, increasing charity care requirements, and federally

mandated expansions. Most importantly, the memo recognized that

whatever policy was adopted needed to be clear and consistently applied.

There are two key aspects to the administration’s revised budget neutrality

policy. First, states are allowed to demonstrate budget neutrality over the

life of the waiver rather than on a yearly basis, allowing more time to

recoup any associated start-up costs. Second, recognizing the difficulty in

estimating the costs of continuing the prewaiver program over the period

of the demonstration and the inherent element of judgment in undertaking

such an estimate, the administration announced that it was open to state

suggestions on the development of a new baseline methodology.

According to HHS and Office of Management and Budget (OMB) officials

who share responsibility for implementing this revised policy, there are

30Past insistence on budget neutrality had effectively limited the scope of 1115 waivers to small,

substate demonstrations. The only prior use comparable to recent statewide waiver applications was

the 1982 initiation of a managed care program in Arizona, a state that previously had not participated

in Medicaid.

31Minnesota obtained an 1115 waiver in 1982 to move low-income families and elderly recipients in the

Minneapolis area and one rural county into HMOs. Budget neutrality was addressed by requiring that

the capitation rate be structured at 90 to 95 percent of fee-for-service costs for these beneficiaries.

Page 25 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Chapter 1 

Introduction

three critical steps in determining baseline costs: (1) selecting a base year,

(2) developing a trend factor for growth from the base year to the first year

of implementation, and (3) developing a trend factor for baseline costs

over the period of the waiver. The method used to develop baseline costs

is important because it is the benchmark against which the administration

assesses waiver costs. The higher the baseline, the easier it is for a state to

demonstrate cost neutrality.

Monitoring and Enforcing

Budget Neutrality

The final waiver agreement consists of a set of terms and conditions that,

among other things, spells out how budget neutrality will be monitored

and enforced. Although there are important state-specific variations, the

administration has taken two basic approaches to enforcement. Tennessee

and Florida have an aggregate cap on the amount of federal matching

funds available for their demonstrations, while all other states have a per

capita limit. The federal government will not match state expenditures

above the specified caps. Table 1.3 highlights the important differences in

what the expenditure caps cover and how they work in the four states

whose budget neutrality agreements we assessed.

Table 1.3: Methodology for Enforcing

Budget Neutrality Expenditure Limits State Methodology

Aggregate cap

Tennessee Expenditure limit is on total Medicaid program, including

long-term care, which is not part of the demonstration;

expenditures for traditional and new eligibles are

matched up to the cap.

Florida Expenditure limit only applies to acute care costs and

DSH; expenditures for traditional and new eligibles are

matched up to the cap.

Per capita limit

Hawaii Expenditure limit applies to acute care costs of traditional

Medicaid population; expenditures on new eligibles are

not matched, but program savings can be applied to

cover their costs.

Oregon Expenditure limit applies to acute care costs of traditional

Medicaid population and new eligibles, but a formula

limits the number of those newly eligible for which federal

matching funds are available.

Aggregate caps are the most straightforward and uniform of the two

approaches. In Tennessee and Florida, the federal government agreed to

an explicit expenditure limit on demonstration costs. With the exception

of certain recipient growth in Florida, the federal government will not

Page 26 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Chapter 1 

Introduction

match any costs above this cap. For states that use the per capita

approach, the federal government agreed to a cost-per-recipient limit. For

Hawaii, this cost limit is based on per capita fee-for-service costs from

1993 trended forward to the first year of the demonstration. If, as the state

anticipates, the switch to managed care produces savings over

fee-for-service rates, they can be applied to the costs of those newly

eligible. In Oregon, the agreement specifies per capita cost limits for both

traditional and newly eligible enrollees. However, the number of new

eligibles is limited to an agreed-upon percentage of traditional Medicaid

enrollment. With the exception of Tennessee, no state is held at risk for

growth in the Medicaid population caused by an economic downturn.

Florida has an escape valve from its aggregate cap if growth in the

Medicaid population exceeds projections by 3 percent or more.

Objectives, Scope,

and Methodology

We reviewed the financing arrangements for approved 1115 Medicaid

demonstration waivers in several states, with a focus on (1) the

relationship between the waiver and other state health reform initiatives,

(2) the planned sources of funding available to finance expanded

coverage, (3) the potential net impact of these waivers on federal Medicaid

expenditures, and (4) the actual waiver expenditures of states with the

most implementation experience. Although our study focused on 1115

waivers in Tennessee, Florida, Oregon, and Hawaii, we closely monitored

other pending waivers, which we use as examples throughout this report.

For a detailed description of our methodology, see appendix I. Our review

was conducted from August 1994 through August 1995 in accordance with

generally accepted government auditing standards.

Page 27 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Chapter 2 

Theory Behind Expanding Medicaid

Coverage Without Increasing Program

Expenditures

Although the administration has adopted a more flexible approach toward

budget neutrality, it contends that all approved comprehensive 1115

demonstrations are in fact budget neutral. Before addressing this issue in

the next chapter, this chapter describes and categorizes waiver funding

strategies—strategies that states say will result in coverage expansion

without increasing expenditures beyond what their smaller, prewaiver

Medicaid programs would have cost. In fact, compared to the cost of

continuing the existing Medicaid program, many states project that the

demonstrations could actually save money. State officials estimate that the

four 1115 demonstrations whose financing we examined in detail could

add up to 2 million previously uninsured individuals while yielding savings

of about $6 billion over 5 years.

Table 2.1: State Projections of 5-Year

Savings Under 1115 Waivers Dollars in billions

Tennessee Florida Oregon Hawaii

State share $1.6 $.845 $.017 $.429

Federal share 3.2 0.0 .029 .005

Total $4.8 $.845 $.046 $.434

Planned Sources of

Funding for 1115

Medicaid Waivers

States rely on a similar mix of funding sources that, analytically, can be

grouped into two major categories: (1) Medicaid resources redirected

from existing programs, such as the Disproportionate Share Hospital

Program (DSH),32 and (2) expected savings, primarily from different forms

of managed care delivery. In addition, many states collect user fees—the

premiums charged to new program enrollees. Finally, in a few cases, state

funds used to subsidize insurance programs for low-income residents are

being folded into the waiver. Based on a review of waiver applications and

discussions with HCFA and state officials, table 2.2 (1) summarizes the

planned funding sources for expanded coverage in four states over the

5-year terms of the demonstrations and (2) highlights the relative

importance of the various categories of funding.

32DSH compensates hospitals that serve the uninsured and a large Medicaid clientele.

Page 28 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Chapter 2 

Theory Behind Expanding Medicaid

Coverage Without Increasing Program

Expenditures

Table 2.2: Planned Sources of Funding for Expanded Coverage Over the 5-Year Terms of 1115 Demonstrations

Tennessee Florida Oregon Hawaii

Redirected Major $$$ Important $$ No role Major $$$

DSH DSH DSH

Public health programs Medically Needy Program

Program savings Important $$ Major $$$ Major $$$ Important $$

Managed care Managed care Managed care Managed care

Reimbursement reform Priority list

Employer mandate

Other Less important $ Less important $ Less important $ Less important $

Premiums Premiums State-funded programs Premiums

State-funded programs

Note: This categorization is based on expected funding sources before states started

implementing their waivers. Chapter 4 addresses the extent to which state expectations have

been realized.

Comparing the major funding sources across states can be tricky. For

example,

• Hawaii’s waiver application never quantified expected managed care

savings,

• Tennessee’s waiver application identified premiums but not DSH as a

financing source, and

• Florida quantified its funding sources but omitted premiums because they

will be used to offset state costs.

Despite these obstacles, a few generalizations can be made about the

magnitude and relative importance of core, coverage expansion funding.

The conventional wisdom that 1115 expansions are financed largely by

managed care savings is misleading. In at least two states with approved

waivers, funds redirected from DSH and other programs play a more

significant role. On the other hand, states with relatively small DSH

allotments rely to a greater extent on managed care or other forms of

savings. Finally, premiums are a less important and more uncertain source

of funding.

Page 29 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
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Expenditures

Funds From DSH and

Other Programs Play

Major Role

Based on a review of waiver applications and discussions with HCFA and

state officials, DSH and other redirected funds in Tennessee’s and Hawaii’s

demonstrations appear to be a more important coverage expansion

financing source than either expected managed care savings or any

capitation discount obtained from managed care organizations.33 As

shown in table 2.3, both states had relatively large DSH programs at the

time their waivers were approved. The theory behind eliminating or

greatly reducing DSH payments to hospitals is that fewer uninsured will

translate into less uncompensated care.34 Compared to other financing

sources, DSH appears to be the most tangible and assured source of

financing.

Table 2.3: DSH Allotment as a

Percentage of Medicaid Expenditures

in Fiscal Year 1993 for Four Waiver

States

Dollars in millions

DSH allotment Percentage

Tennessee $430 16.1

Hawaii 44 11.5

Florida 240 4.8

Oregon 21 2.2

Source: The Urban Institute.

Tennessee’s waiver also proposes to redirect funds from two additional

sources—public health programs and DSH-like payments, referred to as

local government charity care. As with DSH, state officials believe that

routine access to health care by those currently uninsured should

decrease the funding needed for programs such as those for

communicable disease control and maternal and child health.

Florida’s 1115 waiver caps enrollment at about 1.1 million previously

uninsured individuals—less than half of the state’s uninsured population.

Since hospitals would continue to face significant levels of

uncompensated care, the state was reluctant to redirect all of its DSH

33Our recent report on Tennessee’s 1115 waiver program, Medicaid: Tennessee’s Program Broadens

Coverage, But Faces Uncertain Future (GAO/HEHS-95-186, Sept. 1, 1995), focuses primarily on the

financial aspects of the demonstration. It challenges the state’s estimate of the discount obtained from

participating managed care organizations, noting that Tennessee’s rate-setting methodology

understated historical Medicaid costs by approximately 25 percent. See chapter 4 for a discussion of

Tennessee’s waiver expenditures for the first year of the demonstration and the influence of DSH on

the level of state spending.

34Under Tennessee’s waiver agreement, DSH was technically eliminated, since the state was relieved of

the obligation of making payments to hospitals. However, Tennessee’s level of DSH funding in fiscal

year 1993 is built into the waiver expenditure cap and actually grows in future years. For further

details, see chapter 3.

Page 30 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
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funds. Consequently, Florida’s finance plan only shifts growth in its DSH

resources toward coverage expansion. Because of the relative modesty of

its DSH payments, Florida was forced to search for an alternative funding

source. The state decided to eliminate Medically Needy Program coverage

and to reallocate those funds to help subsidize the purchase of private

health insurance. A state is not required to offer a Medically Needy

Program under Medicaid. Because the Medically Needy Program pays for

health services only after individuals have already incurred large liabilities,

Florida considers the program to be similar to DSH. That is, it reimburses

hospitals for bills that otherwise might go unpaid. Together with DSH,

redirected funds are only about one-third of the financing identified in

Florida’s waiver.

Savings Anticipated,

Primarily From

Managed Care

States with relatively smaller DSH allotments like Oregon and Florida rely

to a much greater extent than Tennessee and Hawaii on program savings

to finance coverage expansion. Those expected savings, however,

represent more than just the transition to managed care. Though all 1115

waivers anticipate managed care savings, there appears to be little

unanimity on how quickly savings can be achieved or on what type of

managed care delivery system is the most efficient.

Without substantial DSH funding, Oregon’s expansion goals, as outlined in

the waiver, rely almost exclusively on program savings. In addition to

managed care efficiencies, the state also anticipates lower Medicaid costs

under the waiver as a result of adopting its redefined benefit package,

known as the prioritized list, and an employer mandate. The mandate

would reduce state costs by requiring employers to provide health

insurance coverage to low-income workers initially covered under the

waiver. State estimates suggest that about 85 percent of the financing for

expanded coverage is attributable to the combination of switching to

managed care delivery arrangements and using the prioritized list.

Although the state attributes a specific amount of savings to the list, its

officials told us that, in fact, it is difficult to distinguish such savings from

managed care efficiencies.

About two-thirds of Florida’s financing also relies on program savings.

However, almost half of those savings would result from proposed

reimbursement reforms. Unlike Medicaid physician fees, other medical

services in Florida have had a built-in inflation adjustment. Under the

reimbursement reforms, price increases for services rendered by HMOs,

pharmacies, and clinics, and on an outpatient basis at hospitals, will be

Page 31 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
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Expenditures

lowered by limiting them to increases in the Consumer Price Index plus a

declining number of percentage points with each subsequent year.

Lack of Consensus on

Managed Care Savings

Despite the common thread of reliance on anticipated managed care

savings as a funding strategy, state definitions of just what constitutes

managed care and their approaches toward achieving those savings differ.

Thus, Tennessee uses a reimbursement strategy in the form of a capitation

discount to achieve immediate savings. In contrast, Oregon offers

relatively generous capitation payments but expects control over

utilization of services to reduce the rate of future cost increases. These

differing strategies reflect each state’s decision on how best to balance the

need for savings against (1) the extent and maturity of the state’s managed

care infrastructure and (2) concerns about enrollee access, quality, and

choice.

Demonstrations typically rely on a mix of different types of managed care

delivery, though one is often predominant: HMO-style systems in Oregon,

PPOs in Tennessee, and physician gatekeeper arrangements in Florida.

Table 2.4 shows the actual enrollment of beneficiaries in Tennessee and

Oregon, and Florida’s projection of enrollment if the state implements its

approved waiver. The high penetration of HMOs in Oregon, with enrollment

of almost one-third of the state’s population, facilitated the state’s decision

to rely on this type of managed care delivery system. In Tennessee and

Florida, enrollment in HMOs is significantly lower—6 percent and

18 percent of each state’s residents, respectively. HMOs and PPOs

participating in the 1115 demonstration in all three states are reimbursed

on a per capita basis, referred to as a capitation payment. Physician

gatekeepers, on the other hand, are often paid on a fee-for-service basis,

though some are partially capitated. What differentiates managed care

from fee-for-service is not only the method of reimbursement but the

attempt to control the utilization of services. Although gatekeepers in

Florida would be paid for each service delivered, enrollees must get prior

authorization to see a specialist. PPOs in Tennessee, on the other hand,

have 3 years to employ physician gatekeepers to help control the length of

inpatient hospital stays and the utilization of other services.35

35As of February 1995, about one-half of enrollees had been assigned to primary care physicians. While

one Tennessee PPO, accounting for almost 50 percent of total enrollment, allows specialist visits

without prior authorization, most others require preauthorization.

Page 32 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
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Expenditures

Table 2.4: Percentage Enrollment in

Different Types of Managed Care

Delivery Systems

HMO-style PPO

Physician

gatekeeper

Partially

capitated

plansa

Tennessee 33% 67% 0% 0%

Oregon 91% 0% 4% 5%

Florida 33% 0% 67% 0%

Note: Enrollment data for Tennessee and Oregon are actual data as of May and August 1995,

respectively. Florida, which has not yet implemented its waiver, provided enrollment projections in

its waiver application.

aA plan that is capitated for a range of services that does not include inpatient hospitalization.

Tennessee’s approach to managed care reflects the strategy used by large

employers. The state asked for and received a substantial capitation

discount from participating HMOs and PPOs.36 Tennessee acknowledges that

its shift from fee-for-service to capitation is unlikely to result in significant

utilization savings at the outset, since most traditional and newly eligible

recipients are enrolled in PPOs that lack gatekeepers rather than in more

structured HMO-style managed care arrangements. Despite the belief that

utilization savings will be lower during this initial phase-in period,

substantial capitation discount savings still accrue to the state. Tennessee

officials noted that PPOs in turn often obtain significant pricing discounts

from their providers. Our recent report on the Tennessee demonstration

notes that a primary concern about the future of the demonstration is the

poor financial performance of participating managed care plans and the

willingness of physicians to contract with those plans.37 The

demonstration’s viability, we concluded, may hinge on the continued

willingness of the health care community to participate in the program in

spite of the low reimbursement levels. Although analysis of access to and

quality of health care under the waiver has been limited because of

problems in collecting data on enrollee visits to providers, beneficiary

surveys and advocacy groups both indicate that access is a problem.

36According to the state’s waiver application, a key element in establishing rates for managed care

organizations in Tennessee is the assumption that per capita costs can be reduced from historic levels

because more people will have health care coverage. The reduction recognizes that prior to the waiver,

some of the cost of uncompensated care in the state’s health care system was shifted to other payers.

Skeptical that a reduction in uncompensated care would eliminate a cost shift that had become

“institutionalized,” the state discounted the initial capitation rate under the waiver by about 25 percent,

which it characterized as an attempt to capture about one-half of uncompensated care charges

statewide. The dollars “saved” through the discount help to finance expanded coverage.

37GAO/HEHS-95-186, Sept. 1, 1995.

Page 33 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
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In contrast to Tennessee’s steep, up-front, capitation discounts, Oregon

took a longer range approach that emphasizes access and quality.

Concerned about the adverse impact of its already low Medicaid

fee-for-service rates on the delivery of services, Oregon’s initial capitation

rates represent an increase over comparable fee-for-service rates prior to

the 1115 demonstration. According to state officials, this increase

contributed to the decision of a large number of HMOs to participate in the

demonstration. As a result, about 91 percent of the recipients covered

under Oregon’s 1115 waiver are enrolled in some type of fully capitated

HMO—over three times more than the state’s original estimate.38 Oregon

assumes that more highly structured managed care will better control the

utilization of services and that over time health care costs will rise at a

slower rate than under the old fee-for-service reimbursement system.

Finally, there appears to be a wide spectrum of opinion among 1115

waiver states about the extent of savings from alternative managed care

structures. Florida assumes that a physician gatekeeper arrangement,

which preserves recipient choice, will produce the greatest managed care

savings and anticipates that the majority of its Medicaid population will

select this option. Only one-third of the state’s Medicaid population is

expected to enroll in fully capitated HMOs, the system that Oregon

considers to be the most cost-effective form of managed care delivery. The

gradual erosion of savings in Kentucky, which employs physician

gatekeepers under a 1915(b) waiver, suggests that state enforcement and

oversight of such managed care arrangements are critical. According to

state officials, emergency room use has risen again after an initial decline.

Kentucky’s 1115 waiver application envisioned an eventual transition to

more highly structured forms of managed care.

Newly Insured Asked

to Contribute Toward

Costs

Although the waiver proposals we reviewed rely primarily on redirected

funds and expected program savings to finance coverage expansions,

many state financing strategies incorporate new money raised by charging

premiums to certain enrollees. Such premiums appear to make a modest

contribution toward overall financing, ranging from a high of about

15 percent to as little as 1 percent of the core funding strategies we

discussed. Moreover, at least one state’s application recognized that not all

premiums are likely to be collected.

38This estimate includes all new eligibles as well as both low-income families and the aged, blind, and

disabled. The state’s original estimate of enrollment in fully capitated health plans excluded the latter

group since it was not initially scheduled to be part of the demonstration.

Page 34 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
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Coverage Without Increasing Program

Expenditures

The 1115 waivers in Tennessee, Florida, and Hawaii require most

recipients with incomes above the poverty level to pay premiums on a

sliding scale. In addition, Florida expects a minimal premium contribution

from individuals below the poverty level if they have any income.

Expected premiums in Tennessee are about 8 percent of the combined

total of redirected funds and the capitation discount. In Florida, premiums

account for about 15 percent of the funds the state says it needs to provide

insurance to a target group of about 1.1 million. Officials in Hawaii told us

that premiums expected from newly eligible beneficiaries represent only

about 1 percent of coverage expansion funding. Under the approved

waiver agreements, a substantial portion of the premiums collected in

Tennessee and Florida can be counted as state match, with no reduction in

federal expenditures. In Hawaii, the state and federal governments share

equally in the cost offset represented by individual premiums. Table 2.5

provides hypothetical examples of the different types of arrangements

used to allocate premiums.

Table 2.5: Hypothetical Examples of Premium Allocation Agreements Under Approved Waivers

Cost of

coverage

Federal

match rate

Federal

share

State

share

Enrollee’s

premium

contribution

State A (no enrollee premium) $100 50% $50 $50 0

State B (only state benefits from

premiums) 100 50% 50 40 $10

State C (premium revenue divided

between federal and state

governments) 100 50% 45 45 10

Two States Fold

Subsidized Insurance

Programs for

Low-Income

Residents Into

Waivers

Hawaii and Minnesota are folding existing state subsidized insurance

programs for low-income residents into their waiver programs and, in the

process, bringing along the state dollars that financed them.39 These

program dollars now qualify for federal match.40 While some individuals in

these state-sponsored expansions were eligible for Medicaid under

optional programs for pregnant women and children authorized in the late

1980s, others were not.

39While Tennessee had no means-tested, subsidized insurance programs, the state did fold its high-risk

pool for otherwise uninsurable residents into its 1115 demonstration. Hawaii had no high-risk pool,

and Minnesota and Florida elected to maintain separate programs for the uninsurables outside of their

waivers.

40Minnesota officials told us that they planned to continue extending MinnesotaCare coverage of single

adults and childless couples by using state funds freed up through the 1115 waiver’s shift of children in

MinnesotaCare into Medicaid.

Page 35 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
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Expenditures

Previously, states chose to expand coverage outside of Medicaid for a

number of reasons. First, men, single adults, and childless couples were

generally ineligible for Medicaid unless they were elderly or disabled.

Second, such programs made it easier for states to provide coverage to

entire families. Third, freed from Medicaid rules, states were able to offer

more modest benefits and to require participants to pay premiums,

co-payments, and deductibles. At least one state, Minnesota, cited another

rationale for its self-funded program, MinnesotaCare. State consultants

concluded that the lack of an employer mandate would result in the

migration of children from private insurance to Medicaid. Eligibility rules

in MinnesotaCare were designed to prevent such a migration. Thus,

MinnesotaCare enrollees must have been uninsured for the 4 months

immediately preceding enrollment and may not have had access to

employer-subsidized health insurance for the previous 18 months. HCFA

allowed Minnesota to maintain these barriers in its approved 1115 waiver.

Page 36 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Chapter 3 

Three of Four Demonstration Waivers Are

Potentially Not Budget Neutral

Contrary to the administration’s assertion that approved Medicaid 1115

waivers are budget neutral, net federal spending in the four states we

examined could potentially exceed projected without-waiver program

costs over the 5-year duration of the demonstrations. The net additional

federal funding available in these four states is small in relation to

allowable demonstration spending. However, overall federal Medicaid

expenditures could grow significantly if the administration shows a similar

flexibility in reviewing the large backlog of pending waivers.

Administration officials told us that, since some states’ Medicaid

expenditures were growing faster than the national average in the past, the

budget neutrality of each proposed waiver should be evaluated

independently in order to capture these variations. Such an approach is

difficult because of the lack of consistently generated, state-specific

forecasts. Lacking such data, we relied on the only available

forecasts—national projections of how the current Medicaid program

would grow over the 5-year duration of waiver programs.41 At the same

time, we reviewed waiver applications and talked with state officials to

identify factors suggesting whether a state’s Medicaid expenditures would

indeed exceed the national norm. We found no evidence to support the

high budget caps agreed to by the administration.

Spending Limits

Inconsistent Under

Four Approved

Waivers

Medicaid 1115 waiver programs are popular because they allow the

administration to grant states significant program flexibility. Since the

1980s, OMB has used its budget neutrality policy to ensure that states were

not given access to additional federal funding at the same time they were

provided with greater program flexibility. Rather than applying a uniform

methodology to measure the budget neutrality of waiver applications

approved since 1993, the administration has allowed considerable

variation in growth of baseline costs from state to state.

According to the administration, each of the waiver programs is budget

neutral, even though the individual growth rates vary significantly. The

results of the administration’s flexible, state-specific approach are shown

in table 3.1, which summarizes the rates of increase allowed in the four

agreements—Florida, Tennessee, Oregon, and Hawaii. Also included in the

table are the administration’s projected rates of growth for Medicaid on a

nationwide, current services basis over roughly the same time period.

41Since we were evaluating the administration’s budget neutrality assessments, we used OMB’s

national Medicaid projections rather than those produced by the Congressional Budget Office.

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Three of Four Demonstration Waivers Are

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Table 3.1: Allowed Growth Rates Under Four Approved 1115 Waiver Agreements

Numbers in percent

Year 1 Year 2 Year 3 Year 4 Year 5 Average

OMB FY94 projectiona 14.5 15.4 13.0 12.2 11.2 13.3

Tennessee 16.4 8.3 7.5 5.7 5.1 8.5

Oregonb 11.2 36.9 20.6 6.3 11.5 16.8

Hawaiib 30.5 15.2 13.3 14.4 14.4 17.4

OMB FY95 projectiona 10.6 12.2 12.3 12.2 11.7 11.8

Florida 16.3 15.6 15.4 14.8 14.2 15.3

aEach year the president’s budget contains OMB’s projection of expected growth in the Medicaid

program on a nationwide, current services basis. States are grouped under the OMB projection

for the fiscal year in which their waiver was approved.

bOregon’s and Hawaii’s rates of growth depend on an estimated number of individuals enrolled

as defined in the waiver agreements. Actual rates of growth will vary depending on program

enrollment. See appendix I for a detailed explanation of our methodology for arriving at these

figures.

Table 3.1 shows that in three out of four states, the waiver agreements

permit growth above what OMB projected for the Medicaid program as a

whole at the time the waivers were approved. The growth patterns among

states also vary. The growth rates of Tennessee, Florida, and Hawaii are

the highest in the first year of their waiver. While Florida’s growth rate

declines gradually in each subsequent year, both Tennessee’s and Hawaii’s

drop dramatically in the second year and then decline more slowly in the

remaining years of their demonstrations. In Oregon, however, the highest

rate of growth is in the second and third years, with dramatically lower

increases in the last two.42

Given the unique state setting of each Medicaid program, some variation in

the rate of Medicaid growth among states is to be expected. However,

even though OMB was predicting overall lower growth in Medicaid, state

waiver applications did not identify future trends to justify their

higher-than-average growth rates over the course of the demonstrations.

Instead, states used a variety of arguments primarily based on history and

options available under current statute to convince the administration that

their particular situation warranted a high rate of growth.

42Oregon’s estimates of expenditure growth assume high enrollment in the early years, as individuals

who were previously ineligible for coverage move into the program. The estimates also assume that

during the last 2 years the state will implement its employer mandate, resulting in a decrease in the

number of individuals enrolled in the program and lower costs. In addition, by the fourth year of the

waiver, managed care is expected to restrain medical costs.

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Three of Four Demonstration Waivers Are

Potentially Not Budget Neutral

HCFA and state officials admit that, in some states, continued Medicaid

growth at historical rates is unsustainable because of the great strain it

places on state budgets. Moreover, several of the primary contributors to

the growth of state Medicaid budgets over the past 5 years are no longer

present. For example, some states’ use of targeted provider taxes and

donations contributed to the rapid rise in DSH funding between 1989 and

1993, but recent legislation strictly limits—and in some cases caps—such

growth. It also appears unlikely that states will be asked to absorb major

new federally mandated expansions of populations and benefits—a

practice that contributed to high growth rates in the past.43

As shown in figure 3.1, the assumption that higher historical rates of

Medicaid growth will continue runs contrary to the administration’s own

projections of nationwide Medicaid growth on a current services basis.

Each successive projection since 1993 shows a decline in the rate of

growth in Medicaid. In addition to pointing to the history of recent rapid

growth in Medicaid expenditures, states used the so-called “hypotheticals”

argument to justify higher baselines. They argued that groups who were

hypothetically eligible for Medicaid coverage under existing law, but had

not been included in a state’s Medicaid plan, should be considered part of

the state’s baseline population for the purpose of determining budget

neutrality. Including hypotheticals raises baseline costs, making budget

neutrality easier to achieve.

43No major federal mandates have been added since 1991.

Page 39 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
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Three of Four Demonstration Waivers Are

Potentially Not Budget Neutral

Figure 3.1: OMB Projections of

Medicaid Current Services Outlays Percent

0

2

4

6

8

10

12

14

16

18

1993 1994 1995 1996 1997 1998 1999 2000

Fiscal Year 1993

Fiscal Year 1994

Fiscal Year 1995

Fiscal Year 1996

The Hawaii, Kentucky, Minnesota, Rhode Island, and Ohio waiver

agreements allow hypothetical populations to be included in the baselines.

To date, the inclusion of hypotheticals has been limited to those

individuals who would actually be covered by the demonstration and who

are optionally eligible for Medicaid under section 1902(r)(2) of the Social

Security Act.44 Hawaii and Minnesota have covered some of this

population outside the Medicaid program in the past through state-only

funded programs.45 A Hawaii Medicaid official estimated that including the

1902(r)(2) population added approximately $56 million to the state’s

waiver baseline over the 5-year life of the program—about 4 percent of

total waiver agreement funding. In Kentucky, Rhode Island, and Ohio,

however, hypotheticals were not covered by any state-funded program.

44Under section 1902(r)(2) of the Social Security Act states were essentially given the option to expand

coverage of women, children, the elderly, and the disabled by employing less restrictive eligibility

methodologies.

45Some individuals eligible for Medicaid under section 1902(r)(2) have been covered under Hawaii’s

General Assistance or State Health Insurance Program and under MinnesotaCare in Minnesota.

Page 40 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
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Three of Four Demonstration Waivers Are

Potentially Not Budget Neutral

In each waiver we reviewed that included hypotheticals in the baseline,

state officials mentioned cost containment as a primary consideration in

seeking 1115 demonstration authority. It is questionable, therefore, that

these states would have added optional eligibility groups to their Medicaid

programs without the waiver.

Nationwide Medicaid

Expenditure

Forecasts Used to

Assess Budget

Neutrality

The complexity of and variation in individual state programs makes it

difficult to assess budget neutrality without a consistent frame of

reference.46 Lacking state-specific Medicaid expenditure forecasts, we

used OMB’s current services projections of growth in Medicaid for the

nation as a whole. A current services projection is policy neutral and only

reflects medical inflation, normal growth in the eligible population, and

changes in utilization for the entire Medicaid program.

To determine if the four approved waivers were budget neutral, we first

estimated the cost of continuing the traditional Medicaid program—absent

the demonstration—in each state. This estimate—referred to as

“without-waiver spending”—was developed by adjusting for inflation in

the following manner: We adjusted the cost of providing Medicaid in the

year prior to waiver implementation at the rate specified by OMB in its

forecast of future Medicaid current services outlays. We compared this

without-waiver spending estimate to total projected costs under the

waiver expenditure caps negotiated by each state and the administration.

The difference between our without-waiver projection and the waiver

expenditure cap in each state is the basis for our conclusion of whether an

agreement is budget neutral. When the difference was positive, we

examined state-specific information to determine if there was any

identifiable reason why the waiver expenditure cap should exceed our

without-waiver spending projection and still be regarded as budget

neutral.

We applied this methodology to the two types of waiver spending caps

agreed to by the administration, aggregate and per capita expenditure

limits. For states that use the aggregate cap—Tennessee and Florida—the

46Reliable HCFA Medicaid expenditure data that are sufficiently flexible to analyze waiver programs

are limited. For example, one HCFA report contains auditable expenditure data by service category;

however, expenditures on these services cannot be related to eligible individuals. On the other hand, a

different report on expenditures by eligibility category omits items such as DSH and capitation

payments. Moreover, these data are unreliable because components may not sum to report totals or

may rely on estimated amounts. Finally, auditable expenditure reports do not allow for the separation

of acute care services for recipients covered by the waiver programs from those who are not part of

the demonstration. In a number of states, waivers exclude participation by aged, blind, and disabled

beneficiaries. Since 1115 waivers often segment the Medicaid population and services in ways or time

periods not reflected in HCFA reports, budget neutrality analysis often relies on other state databases.

Page 41 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
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Three of Four Demonstration Waivers Are

Potentially Not Budget Neutral

waiver funding limits are specified in the terms and conditions approving

the demonstration. For states with per capita limits—Hawaii and

Oregon—the spending cap depends on the actual number of enrollees in

the waiver program. To assess the potential budget neutrality of these per

capita agreements, we used enrollment projections developed by each

state and submitted to HCFA in conjunction with approval of the waiver. If

actual enrollment proves to be higher than these initial projections, then

the waiver agreement funding limit will generally be higher and the state

will have access to more funds than we projected. Conversely, if

enrollment falls below these projections, fewer additional resources would

be available.47

Tennessee For the Tennessee demonstration, the administration specified an

aggregate federal funding cap, with any spending above that cap ineligible

for federal match. The relatively low rates of growth under this spending

limit mimic the growth caps used in the President’s 1993 health care

reform proposal. The waiver agreement expenditure cap covers all aspects

of Tennessee’s Medicaid program, whether or not the associated

populations are being moved into managed care. Figure 3.2 shows a

comparison of Tennessee’s waiver agreement spending cap and our

without-waiver projection of spending. Our without-waiver estimate was

derived by increasing actual expenditures in the year prior to

implementation of the demonstration at the national current services

growth rate projected by OMB. When compared with our without-waiver

spending projection, Tennessee’s waiver expenditure cap is budget

neutral. Savings in subsequent years make up for initial demonstration

costs that exceed projected without-waiver spending.

47In both Oregon and Hawaii, actual enrollment for the first year of the waiver was higher than

estimated.

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Three of Four Demonstration Waivers Are

Potentially Not Budget Neutral

Figure 3.2: Tennessee: Comparison of Waiver Agreement Spending Cap and Projected Spending Without Waiver

Offset by

Program Savings

in Later Years

Waiver

Spending

Cap

Funds in Excess

of Without-Waiver

Spending

Projected Spending Without Waiver (Based on National Medicaid Growth Rates)

5.0

Dollars in Billions

4.0

3.0

2.0

1.0

0.0

1994 1995 1996 1997 1998

1997

While the Tennessee waiver agreement is budget neutral using the current

services methodology, the administration’s treatment of DSH funds raises

another issue. After the first year of the waiver, DSH funding disappears as

a budget item since it is built into the baseline that increases at the

agreed-to rates of growth on overall Medicaid spending.48 However, DSH

48According to HCFA, Tennessee’s DSH payments were not allowed to grow in the first year of the

waiver program—state fiscal year (SFY) 1994. Holding DSH payments constant results in an overall

Medicaid funding increase of 19.6 percent for the remaining elements of the state’s Medicaid program

in SFY 1994. On the other hand, simply comparing SFY 1993 Medicaid expenditures, including DSH,

with the level permitted under the waiver agreement in SFY 1994 results in an overall increase of

16.4 percent.

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funding in Tennessee and a number of other states is capped by law

because it is more than 12 percent of the state’s total Medicaid

expenditures. In such states, DSH funding is only permitted to grow when it

falls below this 12-percent cap.

Under the waiver agreement, Tennessee’s DSH funding is allowed to grow

after the first year of the waiver, even though it exceeds the 12-percent

limit.49 Consequently, Tennessee is eligible for approximately $250 million

in DSH growth that would not have been allowed without the waiver.

Without this additional DSH funding, net savings to the state and the federal

government under the Tennessee waiver agreement would have been

higher.

Since the Tennessee agreement, the administration has separated DSH

funding from other aspects of waiver program funding. This approach

allows the cap on DSH growth to be enforced. Moreover, HCFA officials told

us that if DSH funding is growing at a slower rate than the other program

elements covered by the waiver, then that lower growth rate is applied to

any DSH growth.

Florida As in Tennessee, the Florida waiver agreement has an aggregate cap on

demonstration expenditures.50 The cap only applies to the acute care and

DSH portions of the state’s Medicaid program. Florida relied heavily on an

historical argument to justify its higher-than-average rates of growth under

the waiver, even though some state officials later told us that it was

unlikely that such growth could be sustained.51 Figure 3.3 compares

49In contrast, our assessment of the budget neutrality of Tennessee’s waiver agreement held DSH

payments constant until they would have constituted less than 12 percent of total Medicaid

expenditures. Thus, our approach is consistent with statutory DSH limits.

50The waiver agreement includes a circuit-breaker provision that allows Florida to eclipse the waiver

agreement cost cap in the event that the state’s traditional Medicaid population exceeds projections by

3 percent or more.

51A Florida official told us that the state’s 1115 waiver was presented to the legislature at about the

same time the application was submitted to HCFA. This official was skeptical that the legislature

would sustain the past rates of growth in Medicaid in order to finance coverage expansion under the

waiver. A more likely scenario, he said, is that the legislature would choose to let Medicaid grow at a

slower rate than in the past. The Florida legislature adjourned in both 1994 and 1995 without agreeing

to implement the waiver program. During the 1995 session, the Governor’s waiver bill was never

reported out of subcommittee. In its place, the legislature considered alternatives that differed

considerably from the waiver approved by the administration in September 1994. No consensus

emerged, and the governor planned to call a special legislative session during the summer of 1995.

According to a Florida official, the state budget approved by the legislature already moves money from

social services programs to prison construction—including managed care savings accrued under the

state’s more limited 1915(b) and voluntary HMO programs. Managed care savings are an important

source of funding for expanded coverage.

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estimated waiver agreement spending and spending without the waiver.

Our without-waiver estimate was derived by increasing actual

expenditures in the year prior to implementation of the demonstration at

the national current services growth rate projected by OMB. The

comparison shows that the waiver spending cap exceeds our

without-waiver estimate, with the difference equaling $4.5 billion in state

and federal funding.

Figure 3.3: Florida: Comparison of Estimated Waiver Agreement Spending Cap and Projected Spending Without Waiver

Funds in Excess

of Without-Waiver

Waiver Projection

Spending

Cap

Projected Spending Without Waiver (Based on National Medicaid Growth Rates)

Dollars in Billions

10.0

8.0

6.0

4.0

2.0

0.0

1995 1996 1997 1998 1999 2000

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We also analyzed the extent to which Florida’s coverage expansion goals

depend on this $4.5 billion in excess funding. Our analysis shows that

Florida’s enrollment plans would have to be scaled back without the

excess funds provided under the waiver agreement. If the funding limits

for Florida’s waiver agreement had been based on national projections of

growth in the Medicaid program, both DSH and the state’s Medically Needy

Program would have grown at slower rates. As a result, almost $1 billion

less than the amount needed to meet the state’s expansion goals would

have been available. As shown in table 3.2, the $4.5 billion in excess

funding potentially available under the waiver more than covers that

shortfall. We believe that the difference between the excess funds

available and the shortfall—about $3.5 billion—provides a backup if state

assumptions about managed care savings or other funding sources prove

faulty.

Table 3.2: Comparison of Florida’s

Expansion Cost Estimates and Budget

Neutral Growth in Without-Waiver

Program

Dollars in billions

Budget projection Amount

Expansion costs $5.864

Funds available to expand coverage assuming budget neutral growth in

DSH and Medically Needy Program 4.869

Shortfall .995

Funds in excess of our without-waiver spending projection 4.527a

Backup: difference between excess funds and shortfall 3.532

aThe federal share is about $2.5 billion (55 percent), and the remainder consists of state matching

funds.

Oregon It is more difficult to apply our methodology to states with per capita

waiver agreements, like Oregon. As implied by the term “per capita,”

estimating both the waiver agreement spending cap and without-waiver

expenditures requires assumptions about enrollment. Moreover, in

Oregon, the mix of benefits changed in the transition from traditional

fee-for-service Medicaid to the demonstration, making it more difficult to

arrive at a base-year cost. In addressing these methodological challenges,

we used the projected enrollment in the waiver agreement to estimate

spending, and we derived a base-year cost from state reports. We

discussed our methodology with Oregon officials, who agreed that it was

appropriate. Figure 3.4 compares estimated waiver agreement spending

and spending without the waiver. Our without-waiver projection was

derived by increasing base-year estimated expenditures at the national

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current services growth rate projected by OMB. The comparison shows that

the Oregon waiver spending ceiling exceeds our without-waiver

projection.

Figure 3.4: Oregon: Comparison of Estimated Waiver Agreement Spending Cap and Projected Spending Without Waiver

Funds in Excess

of Without-Waiver

Projection

Estimated

Waiver

Spending Cap

Projected Spending Without Waiver (Based on National Medicaid Growth Rates)

Dollars in Billions

0.8

0.6

0.4

0.2

0.0

1994 1995 1996 1997 1998

Hawaii The Hawaii waiver expenditure cap is also based on per capita costs. As

with the Oregon spending limit, all the pieces needed to calculate the

projected waiver costs were not included in the waiver agreement

documents. HCFA and Hawaii have agreed to use 1993 as the base year to

calculate budget neutrality, but have not yet agreed on per capita costs for

the various eligible populations. Our analysis was further complicated by

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the fact that Hawaii has not yet completed its final enrollment count for

the base year. To make our calculation of program costs, we used a

preliminary state average per capita cost and an estimate of the base-year

enrollment from waiver documents. According to state officials, these

were the best figures available. Figure 3.5 compares estimated waiver

agreement spending and spending without the waiver. Our without-waiver

projection was derived by increasing base-year estimated expenditures at

the national current services growth rate forecast by OMB. The comparison

shows that the waiver expenditure cap exceeds our without-waiver

spending projection.

Figure 3.5: Hawaii: Comparison of Estimated Waiver Agreement Spending Cap and Projected Spending Without Waiver

Funds in Excess

of Without-Waiver

Projection

Estimated

Waiver Spending

Cap

Projected Spending Without Waiver (Based on National Medicaid Growth Rates)

Dollars in Billions

0.4

0.3

0.2

0.1

0.0

1994 1995 1996 1997 1998 1999

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Of the four waiver agreements we analyzed, only Hawaii’s included a

hypothetical population in its baseline. As illustrated by figure 3.6, our

analysis shows that the inclusion of this hypothetical population—made

up of children that had previously been covered by state-only funded

programs and who were eligible for Medicaid under section

1902(r)(2)—did not significantly affect the cost of implementing the

waiver over its 5-year life.52

Figure 3.6: Impact of Including “Hypothetical” Populations in Hawaii’s Program Baseline

Estimated

Waiver Spending

Cap

Funds in Excess

of Without-Waiver

Projection

Attributable to

“Hypotheticals”

Projected Spending Without Waiver (Based on National Medicaid Growth Rates)

Dollars in Billions

0.4

0.3

0.2

0.1

0.0

1994 1995 1996 1997 1998 1999

52Kentucky also included the optional 1902(r)(2) population in its waiver agreement baseline. Because

this population is so much larger in Kentucky than it is in Hawaii, it would have had a significant

impact on the cost of Kentucky’s demonstration program. Kentucky’s legislature refused to permit

implementation of the state’s approved waiver.

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State Variation Does

Not Justify Waiver

Agreement

Expenditure Caps

In responding to our work on budget neutrality, the administration said

that the characteristics of individual states—primarily historical

trends—justified waiver growth limits higher than projected national

average program growth. However, none of the four waiver applications

we analyzed in detail offered a rationale for the expected

higher-than-average rates of growth in expenditures, enrollment, or

medical inflation. OMB officials also told us that the four state Medicaid

programs we analyzed in detail had been growing faster than the national

average. Table 3.3 compares the national average with growth in Medicaid

spending from 1988 to 1993 for Florida, Tennessee, Oregon, and Hawaii.

Table 3.3: Recent Medicaid Spending

Trends in Four Waiver States Numbers in percent

1988-1993 trend

Florida 25.8

Tennessee 20.9

Oregon 20.4

Hawaii 17.5

National average 19.4

Note: Trends and growth in expenditures exclude growth in DSH.

This analysis shows that, with the exception of Florida, these states were

not growing significantly faster than the national average. In fact, the trend

in Medicaid expenditures in Hawaii suggests that it might be appropriate

for its waiver program to grow more slowly than the national average.

Federal mandates have contributed significantly to variations in state

Medicaid growth rates over the last 8 years. According to a 1994 Urban

Institute study, states with historically more restrictive Medicaid programs

grew very rapidly during the period 1988 to 1992, with much of the growth

attributable to newly eligible adults and children coming into the program

under federal mandates.53

Such new mandates were at least partially responsible for escalating costs

in Florida, a state whose Medicaid growth rate from 1988 to 1993 was

significantly higher than the national average. Thus, previously ineligible

adults, children, elderly, and disabled individuals accounted for more than

30 percent of the increase in Medicaid spending between 1989 and 1990.

According to state officials, the establishment of an optional Medically

53Theresa Coughlin and others, “States’ Responses to the Medicaid Spending Crisis: 1988 to 1992,”

Journal of Health Politics, Policy, and Law, Vol. 19, No. 4 (Winter 1994).

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Needy Program—which totaled $98 million by 1993—also contributed to

state expenditure growth. More significantly, it had the unintended

consequence of helping to greatly expand enrollment of low-income

families. Florida officials explained that an outreach program designed to

increase participation in the Medically Needy Program uncovered many

low-income families eligible for Medicaid. Enrollment of low-income

families rose nearly 24 percent per year from 1990 to 1993, with associated

expenditures more than doubling from just under $500 million to nearly

$1.2 billion. Finally, state officials told us that the recession in 1991 also

contributed to growth in the number of low-income families enrolled in

Medicaid.

Although these factors contributed to the sharp rise in Florida’s Medicaid

expenditures in the early 1990s and resulted in waiver growth rates

significantly higher than the national average, even Florida officials do not

expect a continuation of past trends. Actual experience appears to support

their predictions. For example, while the waiver agreement estimated that

acute care expenditures would grow at 17 percent in 1994, the base year,

actual spending increased by only 12 percent without implementation of

the waiver. Moreover, Florida officials told us that enrollment growth

among low-income families has leveled off at around 4 or 5 percent over

the past 18 months. The Florida waiver agreement estimates that

low-income family enrollment growth will fluctuate between 2 and

3 percent over the life of the waiver.

Three Waivers

Provide Access to

Significant Additional

Funding

While the administration contends that each of the waiver agreements we

reviewed is budget neutral, our analysis of both national and state-specific

data shows that most of the agreed-upon rates of growth are too high. As a

result, the agreements provide these states with access to significant

additional federal Medicaid funding.54 Table 3.4 compares the waiver

agreement spending caps and our without-waiver expenditure projections

(based on national Medicaid growth rates), aggregated over the 5-year

duration of the programs. The $1.9 billion in net additional federal funds

should not be interpreted as a precise prediction of the amount of

additional funds available under these four waivers; rather, it reflects the

significant magnitude of the differences between the two projections.

54States are not obligated to spend up to the limits placed on them by the agreements. Moreover, the

federal government will only provide funds to match actual state expenditures.

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Table 3.4: Comparison of Four Section

1115 Waiver Agreement Expenditure

Caps and Projected Without-Waiver

Spending

Dollars in billions

Estimated waiver

agreement

spending

Projected

without-waiver

spending

Additional

funds

Federal

share

Tennessee $20.9 $22.2 ($1.3) ($0.9)

Florida 37.2 32.7 4.5 2.5

Oregon 2.7 2.3 0.4 0.2

Hawaii 1.3 1.1 0.2 0.1

Net additional

funds $3.8 $1.9

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We analyzed preliminary financial results from 1115 demonstrations in

Tennessee, Oregon, and Hawaii—three states with significant waiver

implementation experience. The data suggest that waivers will continue to

evolve as states attempt to balance coverage expansion goals against

systemic cost-containment pressures. Changing political/fiscal realities in

all three states and the potential for an acceleration in the rate of medical

inflation underscore the challenges in implementing fixed-cost agreements

in a variable-cost environment.

Enrollment of previously uninsured individuals in both Oregon and Hawaii

surpassed state estimates. Oregon was able to meet greater than expected

demand without exceeding its waiver agreement expenditure cap. Hawaii,

however, projects demonstration spending will be about 23 percent higher

than permitted by its waiver agreement—costs it will have to offset in

future years if it is to live within the expenditure cap. After maintaining

open enrollment for a full year and achieving about 80 percent of its

coverage expansion goal, Tennessee abruptly cut off enrollment because

of a budget crisis it attributes to the demonstration. In contrast to Hawaii,

Tennessee’s first-year demonstration costs were 14 percent below its

waiver agreement spending cap. While Tennessee’s waiver program

covered several hundred thousand previously uninsured individuals, total

expenditures were on a par with its significantly smaller prewaiver

program.

Despite the slowdown in medical inflation, all three states face pressures

to contain future waiver costs. Oregon and Hawaii have announced a

number of initiatives to do so, including higher cost sharing and new

eligibility rules. Since resources up to a state’s waiver funding cap are

available until the end of the demonstration, expenditures to date may not

be a reliable indication of demonstration costs—particularly if medical

inflation accelerates.

Oregon: First-Year

Enrollment and Cost

Experience

Greater than anticipated managed care savings allowed Oregon to offer

insurance to about 50 percent more new enrollees than anticipated during

1994—without breaching the waiver funding agreement.55 Though the

exact amount of the cap is in dispute, HCFA data show that waiver

55Oregon’s first year of waiver implementation—February to December 1994—only covers 11 months.

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expenditures of $347 million were about $34 million less than the

administration’s estimate of the waiver agreement ceiling.56

As shown in table 4.1, actual 1994 expenditures were remarkably close to

the 1993 cost estimates that formed the basis of the federal-state financing

agreement—within about $600,000. However, as this table also

demonstrates, traditional Medicaid beneficiaries were less expensive than

the state estimated. Table 4.2 provides our analysis of costs for traditional

Medicaid beneficiaries and those newly eligible under the waiver on a

per-person-per-month (PPPM) basis.57 On average, traditional eligibles cost

25 percent less than anticipated. Those newly eligible, however, cost

36 percent more. Oregon officials attribute the higher costs of new

eligibles, in part, to the fact that many are sick when they apply for

coverage. Thus, hospitals are signing up individuals for health benefits

under the waiver as soon as they are admitted. Currently, eligibility for

benefits commences with the submission date rather than with the

subsequent approval of the application. Until the newly eligible individual

is enrolled in a managed care plan, providers are reimbursed on a

fee-for-service basis, further increasing state costs.

Higher costs for newly eligible individuals, however, were offset by

additional managed care savings of $38 PPPM for each traditional Medicaid

recipient. In part, state officials credit increased savings to the fact that all

but 8 of 36 counties are served by fully capitated, HMO-style health plans.

As a result, about 91 percent of waiver enrollees, rather than the estimated

28 percent, are receiving services from what the state believes is the most

cost-effective form of managed care.58 We also believe that the current ebb

in medical inflation contributed to lower than expected costs.

56The waiver agreement specifies the maximum allowable costs for each of three categories of both

traditional and newly eligible enrollees. It does not specify a methodology if, as was the case,

enrollment differs from projections, that is, when there are fewer beneficiaries in a more expensive

category or more in a less costly classification.

57The aged, blind, and disabled were not part of the demonstration until February 1995. Thus,

enrollment/cost statistics for traditional Medicaid recipients only reflect low-income families.

58This estimate includes the aged, blind, and disabled. Excluding this group, the percentage of total

enrollees in fully capitated health plans is slightly higher—92 percent. Compared with new eligibles

and low-income Medicaid families (3 percent), a higher percentage of the aged, blind, and disabled

(10 percent) are enrolling in the physician gatekeeper option and thus lowering the percentage

participating in fully capitated plans.

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Table 4.1: Comparison of 1994 Actual

and Estimated Costs and Enrollment

Under Oregon’s 1115 Waiver Costs Enrollment

Dollars in millions and enrollment in thousands

Actual Estimated Difference Actual Estimated Difference

Traditional

Medicaid $224.6 $286.8 ($62.2) 181.9 173.5 8.4

New

eligibles 122.3 60.7 61.6 69.7 46.8 22.9

Total $346.9 $347.5 ($.6) 251.6 220.3 31.3

Table 4.2 Comparison of Estimated

Versus Actual PPPM Costs for

Traditional and Newly Eligible

Beneficiaries Under Oregon’s 1115

Waiver

Actual

costs

Estimated

costs

Traditional Medicaid $112 $150

New eligibles $160 $118

Some Cost Concerns

Spring From Details of

Waiver Agreement

Despite greater-than-expected managed care savings in Oregon, state

officials are concerned about the financial implications of current

cost/enrollment trends. The concern stems from the fact that the

traditional Medicaid population determines the funding base for covering

new eligibles. Under the per capita cost agreement, federal matching funds

for new eligibles are tied to a fixed ratio of new to current eligibles. Thus,

for every four current eligibles, Oregon can claim a federal match for one

new eligible in the first year of the waiver.

In the first year, unexpected enrollment by new eligibles and

higher-than-anticipated costs for this group was accompanied by a drop in

the number of low-income families—the major component of the coverage

expansion funding base.59 Should these trends continue, fewer federal

dollars than needed would be available to meet future waiver costs. In

mid-1995, Oregon officials asked HCFA for approval to implement a number

of cost-reduction initiatives. As of October 1995, Oregon had received

approval to change waiver eligibility rules60 and delay full implementation

of mental health services. HCFA has yet to approve the state’s request to

59Oregon officials attributed the large number of new eligibles to higher-than-anticipated participation

rates rather than to an increase in the number of uninsured state residents. The waiver intentionally

simplified eligibility and enrollment in order to encourage participation. The cost controls now under

consideration (asset tests and co-payments) are intended to reduce participation rates.

60Oregon’s proposed changes apply only to those newly eligible under the waiver. Eligibility would be

based on 3 months’ rather than 1 month’s income, with liquid assets limited to $5,000. In addition,

full-time college students would no longer be able to enroll.

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reduce benefits61 and require premiums/some co-payments for newly

eligible individuals. In addition, state officials told us that

greater-than-anticipated managed care efficiencies may allow them to

reduce the capitation rate.

Other State Fiscal

Concerns

Other, more general, fiscal concerns in Oregon stem from the impact of a

1991 tax initiative, new state priorities that reflect the outcome of the 1994

elections, and uncertainty about the fate of the employer mandate. Under

the tax initiative, any shortfall in education funding that results from a

mandated reduction in the property tax rate must be offset by general

revenues. Funding for the 1115 waiver also comes from general

revenues—rather than from a dedicated tax paid by a specific group.

Similarly, a number of new priorities, such as prison construction, may

further increase the competition for state funds.

The employer mandate plays an important role in Oregon’s waiver finance

plan. Oregon estimates that the mandate, originally scheduled to be

phased in during the last 2 years of the waiver, would reduce both the

number of traditional Medicaid beneficiaries and newly eligible individuals

covered under the waiver. In addition, program costs will be reduced for

low-wage workers who obtain employer-provided coverage but have

incomes below the poverty level. For these individuals, Medicaid will only

pay for costs not covered by the employer-provided insurance.

Growing business opposition to the mandate coupled with a political

realignment in the state legislature creates considerable uncertainty about

the future of this funding source. In 1993, the legislature postponed

implementation of the mandate, potentially increasing state costs in the

process. Although state legislation requires that the mandate be repealed

unless the Congress grants Oregon an exemption to ERISA by January 1996,

the legislature recently sent the Governor a bill that would have repealed

the mandate outright. He vetoed the bill in July 1995. According to state

officials, the administration has indicated that no adjustments will be

made to the waiver financing agreement if the employer mandate is not

implemented. And without the mandate, waiver costs will increase, forcing

the state to make up the difference or to develop additional

61The funding line for covered services would be moved from line 606 to line 581 of the prioritized list

of benefits. Examples of services that would no longer be covered include (1) certain urinary tract and

yeast infections, such as thrush in infants; (2) painful menstruation and pelvic discomfort; (3) chronic

bronchitis; and (4) surgical correction of deformities and injuries of the limbs or feet that may result in

greater mobility or function. The state attributes the low priority attached to these services to the

availability of over-the-counter medicine, to the fact that individuals get better on their own without

medical intervention, or to uncertainty over the benefits of medical treatment.

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cost-containment strategies. In 1994, Oregon estimated that the employer

mandate accounted for about 16 percent of the funds necessary to finance

coverage expansion under the waiver.

Hawaii: First-Year

Enrollment and Cost

Experience

Hawaii believed that state-funded programs subsumed under the waiver

had already identified most of those newly eligible—the so-called gap

group that included those who were not eligible for Medicaid and those

who were either dependents or part-time workers not covered by the

state’s limited employer mandate.62 During the first year of operation,

however, Hawaii enrolled about 36,000 newly eligible individuals who had

not participated in the former state-funded programs. According to state

officials, a significant number of these new recipients are hypothetically

eligible at state option under section 1902(r)(2) —pregnant women or

children—who had not enrolled in the previous state-funded program but

instead were covered by private insurance; the state believes these

individuals dropped private insurance in favor of less expensive coverage

through the waiver. These officials also attributed the unexpected high

enrollment to Hawaii’s current economic slowdown. Table 4.3 compares

estimated and actual enrollment under the waiver for both traditional and

new eligibles. Hawaii officials project that as a result of this

higher-than-expected enrollment, the waiver will exceed the federal

budget limit for 1994-95 by approximately 23 percent—$47 million.

Under the waiver agreement, higher costs in one year can be offset by

lower costs in another—as long as expenditures over the 5-year life of the

waiver do not exceed the cap. Hawaii officials told us that the state

expects waiver costs to be slightly under the cap for the full 5 years of the

program as a result of state efforts to reduce program expenditures. The

following changes in eligibility standards and premiums were effective on

August 1, 1995: (1) the point at which enrollees will be charged the full

premium will be reduced from 296 percent of the federal poverty level to

201 percent, (2) individuals eligible for coverage under the employer

mandate but who meet demonstration income requirements will be

disenrolled, (3) self-employed individuals will be required to pay a

minimum of 50 percent of the premium—regardless of their stated income,

62Hawaii is the only state to require employers to provide health insurance to their workers. Its

expansion of health insurance coverage through the 1974 Prepaid Health Care Act was built on a

tradition of employer-based health benefits. Under the act, employers pay most of the health insurance

premiums. Employees must elect the insurance unless they have comparable coverage from another

source. Employers who provide an extensive benefits package that meets standards described in the

law are not required to cover dependents. Employers offering a more limited, state-approved, benefits

package must then pay at least half the cost of dependent coverage. See Health Care in Hawaii:

Implications for National Reform (GAO/HEHS-94-68, Feb. 11, 1994).

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and (4) parental income will be taken into consideration when

determining the eligibility of students under age 21. The state suspects that

these last two groups either understate income or do not appropriately

account for parental income. Officials in Hawaii told us that premium

collections are keeping pace with expectations.

Table 4.3: Comparison of 1994 Actual

and Estimated Enrollment Under

Hawaii’s 1115 Waiver

Enrollment

Actual Estimated Difference

Traditional Medicaid 71,899 61,000 10,899

New eligiblesa 63,490 27,100 36,390

Total 135,389 88,100 47,289

aActual enrollment for new eligibles includes 22,675 individuals hypothetically eligible at state

option under section 1902(r)(2) who were not previously covered by Medicaid and who will be

counted as traditional eligibles for purposes of budget neutrality.

Tennessee: First-Year

Enrollment and Cost

Experience

During its first year of waiver implementation, Tennessee enrolled about

418,000 previously uninsured or uninsurable individuals. Although its

waiver application proposed an open enrollment period once a year, the

state actually accepted and processed enrollment requests throughout

1994. Moreover, Tennessee liberalized a restriction that had disqualified

participation by individuals with access to insurance as of March 1993 by

moving the effective date to July 1994. In late December 1994, however,

the state unexpectedly announced an end to open enrollment for

individuals not traditionally eligible for Medicaid.63 Enrollment—including

both traditional Medicaid and new eligibles was about 39,000 less than the

state’s 1994 enrollment cap of 1.3 million. Tennessee also informed HCFA

that the enrollment cap for the remainder of the demonstration would be

1.3 million rather than 1.5 million beneficiaries. State officials attributed

the freeze in enrollment of new eligibles to a budget crisis caused, in part,

by demonstration costs.

HCFA reports indicate that the state spent about $443 million (14 percent)

less than allowed under the waiver agreement cap.64 Nonetheless,

Tennessee covered several hundred thousand newly eligible individuals

while increasing expenditures by less than half a percent from SFY 1993 to

63Tennessee officials indicated that applications received but not approved as of the date of the

announcement would be processed.

64In Tennessee, the first year’s cap on federal expenditures applied to the period July 1993 through

June 1994 even though the demonstration did not begin until midway through that time period

(Jan. 1994).

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SFY 1994. Table 4.4 compares SFY 1993 enrollment and expenditures with

those in SFY 1994, the first year in which the waiver became effective.

Moreover, as shown in table 4.5, the state is now projecting lower waiver

expenditures that could increase federal savings over earlier estimates. In

the first 3 years alone, lower expenditures could more than double the

state’s previous estimate of savings due to the waiver.

Table 4.4: Comparison of

Enrollment/Expenditures Under

Tennessee’s Prewaiver Medicaid

Program and the 1115 Demonstration

Dollars in billions

Enrollment Expenditures

Prewaiver Medicaid Program—SFY 1993

Traditional eligibles 777,431

New eligibles 0

Totala 777,431 $2.702

1115 waiver—SFY 1994

Traditional eligibles 758,192

New eligibles 361,264

Totalb 1,119,456 $2.703

aAs of June 1993.

bEnrollment as of August 10, 1994.

Source: HCFA and state reports.

Table 4.5: Comparison of Tennessee’s

Waiver Agreement Spending Limits,

First-Year Costs, and Revised

Expenditure Projections

SFY

Dollars in billions

1994 (actual) 1995 1996 1997 1998

Agreement $3.146 $3.407 $3.663 $3.872 $4.069

Expenditures 2.703a 2.982 3.135

Difference 0.443 0.425 0.528

Note: The state did not issue revised estimates for SFYs 1997 or 1998.

aData as of June 30, 1995.

Source: HCFA and state reports.

Both the (1) gap between 1994 waiver expenditures and the federal cap on

spending and (2) projected reduction in waiver expenditures to well below

the amount permitted under the state’s 1115 financing agreement may be

linked to problems in identifying state matching funds for DSH. HCFA

officials told us that, from the outset, they anticipated Tennessee would

Page 59 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Chapter 4 

Despite Lower Inflation, State

Demonstrations Face Cost Pressures

have difficulty in drawing down federal funds up to the maximum allowed

under the waiver agreement.65 They pointed out that although the

Tennessee DSH program was available to provide a major source of funding

for coverage expansion, the state discontinued its hospital tax with the

onset of waiver implementation. This tax had been a source of state match

for federal DSH funds. Undoubtedly, the shortfall in premiums collected

from newly eligible enrollees and counted as part of state matching funds

also contributed to Tennessee’s financing problems.

Tennessee Encounters

Problems in Collecting

Premiums From Enrollees

Tennessee has encountered serious problems in collecting enrollee

premiums. Initially, the state estimated that it would collect about

$21 million in premiums during the first 6 months of the waiver as new

eligibles gradually signed up for the program; premiums would increase up

to $117 million in the last year when full enrollment had been achieved.

However, for the first 6 months, Tennessee only collected $2.4 million,

forcing it to find other sources of state matching funds.

Lower-than-expected premium revenues in Tennessee are due, in part, to a

series of administrative glitches. Even though enrollment of the uninsured

began in January 1994, initial premium notices were not mailed until June

1994. The notice informed enrollees that premium booklets would be

mailed soon for monthly payments beginning with July. Then, the state

contractor failed to mail up to 80,000 premium booklets, an error that was

not discovered until November 1994. In February 1995, the state sent

letters to nearly 60,000 households notifying them of past due premiums

totaling $31 million. Approximately 62,000 individuals—about 15 percent

of new eligibles—had been disenrolled from the program as of June 1995

and upwards of 20,000 more were within the 30-day notification period for

termination. Another 17,000 families were placed on payment plans to

address overdue premiums.

Implementing

Fixed-Cost

Agreements in a

Variable-Cost

Environment

Though the three waivers discussed in this chapter were approved during

a period of economic recovery and a slowdown in medical inflation, the

recession of the early 1990s coupled with rapid medical price increases

serve as a reminder of the risks posed by fixed-cost agreements in

variable-cost environments. While states have benefited from recent

economic trends, the potential for a resurgence in medical inflation, a

65In retrospect, a line item in Tennessee’s waiver budget—“additional state funds required”—may have

been a clue to the existence of a state funding shortfall.

Page 60 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Chapter 4 

Despite Lower Inflation, State

Demonstrations Face Cost Pressures

recession, and large numbers of traditional and/or new eligibles could

create problems for Tennessee, Oregon, and Hawaii.

In Tennessee, the 1115 agreement provides the state with a fixed budget to

serve both traditional Medicaid and newly eligible recipients. Though the

state appears to have a tight lid on cost increases, it is already under

pressure to raise capitation rates that most providers consider

unrealistically low. A slowdown in economic growth and the associated

increase in Medicaid enrollment due to rising unemployment could further

exacerbate the state’s current budget crisis and provide additional

ammunition to already aggrieved providers.

Increased medical inflation and a recession could pose a somewhat

different dilemma for Oregon and Hawaii. Under the terms of their waiver

expenditure caps, these two states are not at risk for changing economic

conditions that could increase the number of traditional Medicaid

beneficiaries. Thus, the limit on demonstration costs floats upward with

enrollment, permitting increased federal and state Medicaid expenditures.

If increased state costs associated with covering more traditional

beneficiaries is accompanied by an acceleration in medical price

increases, however, the additional budget resources required could

threaten Oregon’s and Hawaii’s coverage expansion plans.

Page 61 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Chapter 5 

Conclusions and Agency Comments

Comprehensive 1115 Medicaid demonstrations have given states flexibility

to test innovative approaches for the delivery of publicly funded health

care services. While the waivers were intended to give states program

flexibility, it is not clear whether the administration’s decision to

simultaneously provide budgetary flexibility is consistent with the current

emphasis on reducing the federal budget deficit. Under the four approved

waivers we analyzed, the federal government is potentially at risk for a net

increase of about $2 billion in Medicaid expenditures. While Tennessee’s

waiver agreement meets the test of budget neutrality, those of Florida,

Oregon, and Hawaii do not. The agreements in these three states represent

the antithesis of the budgetary certainty that the Congress appears to be

moving toward in social program spending.

We believe the granting of additional section 1115 waivers merits close

scrutiny for several reasons. First, the potential budget impact of 1115

waivers may increase if the administration continues to show budgetary

flexibility in its review of additional state proposals. The administration

has granted a number of additional waivers since Florida’s, the most

recently approved waiver whose budget neutrality agreement we

examined in detail. Moreover, the number of pending waivers continues to

grow and now includes New York, whose Medicaid expenditures

represented about 16 percent of national program costs in fiscal year 1993.

Second, given the priority attached to reducing the deficit, it may be

appropriate to consider whether or at what point taxpayers should benefit

from managed care savings that are currently being reinvested to expand

Medicaid coverage to millions of additional individuals.

Finally, though comprehensive 1115 Medicaid waivers were approved

during a period of economic recovery and a slowdown in medical

inflation, the recession of the early 1990s coupled with rapid medical price

increases serve as a reminder of the risks posed by fixed agreements in

variable-cost environments. The combination of higher medical inflation, a

recession, and large numbers of traditional and newly eligible Medicaid

enrollees could pose equally unattractive alternatives for both the federal

government and states: (1) increasing funding or (2) reducing

benefits/denying coverage to hundreds of thousands of people newly

enrolled under the waivers. Consequently, we question whether

demonstration waivers granted for a limited period are the best approach

to reducing states’ uninsured populations.

Page 62 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Chapter 5 

Conclusions and Agency Comments

Agency Comments The Department of Health and Human Services and OMB disagreed with

our conclusion that the waiver funding caps for Oregon, Hawaii, and

Florida are not budget neutral. We continue to believe that the

administration’s waiver funding caps for these states may result in

increased federal spending.

We do not believe that our methodology is the only appropriate method to

estimate budget neutrality baselines, and agree that using a tailored,

state-specific approach would be more appropriate. We did tailor our

methodology to the specific services covered by the demonstrations and

did reflect current DSH rules. We saw no evidence, however, that the

administration itself adopted this approach. The only state-specific data

evident in the negotiating record were historical trends, which were

clearly not expected to continue. The acute and long-term care cost

projections cited in the administration’s comments are not consistent with

OMB’s published forecast of overall growth in the Medicaid program.

While OMB characterized its own approach to budget neutrality as “ad hoc,”

we adopted a consistent and uniform methodology that challenges the

administration to support its contention that these demonstrations should

grow at such high rates. To date, the administration’s own methodology

remains shrouded in generalities. We believe that potential program cost

increases of hundreds of millions of dollars should be based on a more

clearly specified methodology.

Second, contrary to the administration’s assertion, state variation in

Medicaid programs and expenditures was a central component of our

assessment of budget neutrality. After using OMB’s national forecasts to

project without-waiver expenditure trends, we examined the waiver

negotiating record and asked state officials to identify why future state

Medicaid expenditures should exceed the national norm. As noted, we

found no state-specific evidence to support the high budget caps agreed to

by the administration. Even in the case of Florida, whose Medicaid

program had been growing faster than the national average, the state’s

own estimates show that key factors contributing to past growth were not

expected to be sustained.

OMB maintains that “it is more appropriate to use a current law rather than

a current services baseline for adjudicating budget neutrality.” Yet, it

points out that “the President’s budget does not differentiate between the

two.” We do not question OMB’s authority to estimate the baseline,

including anticipated behavioral changes in mandatory programs where

Page 63 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Chapter 5 

Conclusions and Agency Comments

such changes are allowable under current law. We do question whether in

this case such an adjustment is appropriate, based on our review of state

practices in these programs. The only explicit use of current law evident in

the waiver approval process is OMB’s decision to include those

hypothetically eligible for Medicaid under current law within their

baseline. Of the four states we reviewed, OMB’s approach only affected the

baseline for Hawaii, as is reflected in figure 3.6. Since no attempt was

made in Hawaii’s or in other states’ waivers to suggest that they would

have expanded Medicaid eligibility to hypothetical groups if their 1115

demonstrations had not been approved, we chose not to include

hypotheticals in the baseline.

Finally, the administration questioned the basis for our estimate of

expenditures under the waiver funding agreements for Oregon and Hawaii,

states with per capita funding limits. We asked and were told by

administration officials that no estimates had been made of potential

expenditures under those caps. Consequently, we worked closely with

state officials to develop such estimates. State Medicaid officials reviewed

and agreed with our methodology, described in detail in appendix I.

Page 64 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Page 65 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Appendix I 

Objectives, Scope, and Methodology

To examine the financing arrangements for approved 1115 Medicaid

demonstration waivers in several states, we focused on (1) the

relationship between the waiver and other state health reform initiatives,

(2) the planned sources of funding available to finance expanded

coverage, (3) the potential net impact of these waivers on federal Medicaid

expenditures, and (4) the actual waiver expenditures of states with

sufficient implementation experience.

Although our study concentrated on four states, we closely monitored

other pending waivers, which we use as examples throughout this report.

Two criteria guided our sample selection: (1) whether the state was

engaged in other major health reform initiatives and (2) whether it had

begun implementing its approved waiver. At the time we selected our

sample, only three states—Tennessee, Oregon, and Hawaii—had

commenced implementation. Though its waiver had not yet been ratified

by the state legislature, we included Florida in our sample since it was the

first state with a large Medicaid program to gain federal approval of an

1115 waiver.

During our review we (1) analyzed data contained in HCFA expenditure

reports, state 1115 waiver applications, correspondence between HCFA and

state officials concerning the demonstrations, and reports prepared by

state agencies and other interested parties, such as advocacy groups;

(2) interviewed state legislators and officials responsible for the state

Medicaid program and for other health reform initiatives; (3) discussed the

waivers with affected parties, such as health plans, providers, and

advocacy groups; and (4) interviewed HCFA, HHS, and OMB officials

responsible for reviewing and approving waiver applications. We also

reviewed the literature on state health care reform and Medicaid managed

care.

To determine the potential impact of Medicaid 1115 waivers on federal

Medicaid spending, we developed and applied a consistent framework that

compares spending limits approved in each waiver with a benchmark

based on current services budgeting concepts. The framework consisted

of (1) determining base-year costs, for the existing fee-for-service

Medicaid system in that state and inflating these costs at national

projected current services rates to give us our without-waiver spending

estimate; (2) determining the total waiver program cost limits, based on

the waiver agreements; and (3) comparing the two costs.

Page 66 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Appendix I 

Objectives, Scope, and Methodology

Common Aspects of

Our Multistate

Analysis

The four waiver agreement cost limits we analyzed were different in

several respects. Nevertheless, we applied some common rules and

assumptions.

• We used the OMB national current services growth rate in effect at the time

a waiver was approved to project without-waiver spending. For example,

HCFA approved the Oregon waiver in March 1993, so we analyzed the

agreement using the fiscal year 1994 projection OMB made in

February 1993.

• We applied projections made for federal fiscal years to associated state

fiscal years or calendar years, depending on the starting point of the

programs.

• In cases where the total waiver agreement cost depended on program

enrollment—the states that used a per capita cost limit—we used the

states’ enrollment estimates included either in the waiver application or in

answers to subsequent HCFA questions prior to approval.

• The OMB projections of Medicaid current services outlays cover the entire

Medicaid program, not just the populations and services associated with

the waiver programs. By applying these growth rates to the waiver

programs, we are assuming that the rates of growth for the waiver

programs and the entire Medicaid program as a whole would not be

significantly different.

Tennessee The Tennessee waiver agreement has an aggregate cap on total program

cost. The agreement documents specified the base-year cost and the rate

at which this cost would be allowed to grow under the waiver, giving us

the total potential program cost.

Because Tennessee has a high Disproportionate Share Hospital Program

(DSH) allotment and the base-year cost included DSH, we did not simply

adjust the base-year cost for inflation using the OMB current services rates

to develop our without-waiver spending projection.66 To be consistent with

statutory DSH limits, we held Tennessee’s DSH payments constant until they

would have constituted less than 12 percent of total Medicaid

expenditures. At that point, we allowed DSH payments to grow at the same

rate as the rest of the Medicaid program. We adjusted the remainder of the

program for inflation at the rates specified in OMB’s projection for fiscal

year 1994 current services outlays.

66DSH is limited by statute to 12 percent of total Medicaid program funding. States with DSH

allotments higher than 12 percent were capped at their existing DSH levels and prohibited from any

increase in DSH until they fell below 12 percent.

Page 67 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Appendix I 

Objectives, Scope, and Methodology

The net effect of holding DSH constant was that our without-waiver

projection grew more slowly than it would have if we had allowed the

whole program to grow at the OMB rate. Table I.1 shows the waiver

agreement funding limit, our without-waiver estimate, and the difference.

Table I.1: Comparison of Tennessee

Waiver Agreement Spending Cap and

Projected Without-Waiver

Spending—Year by Year

Dollars in billions

1994 1995 1996 1997 1998

Waiver spending cap $3.146 $3.407 $3.663 $3.872 $4.069

Percent growth 16.4 8.3 7.5 5.7 5.1

Without-waiver

spending $3.032 $3.433 $3.853 $4.325 $4.808

Percent growth 14.5 15.4 13.0 12.2 11.2

Difference (savings) $0.114 ($0.025) ($0.191) ($0.453) ($0.740)

Florida Like Tennessee, the Florida waiver agreement has an aggregate cap on

program costs.67 However, this waiver only includes the acute care and

DSH segments of the Medicaid program. The waiver agreement documents

specified the base-year costs and the rate at which the program would be

allowed to grow, giving us the total potential program cost.

To estimate without-waiver spending, we adjusted for inflation the waiver

agreement base-year cost at the rate OMB projected Medicaid current

services outlays would grow beginning in fiscal year 1995.68 Because

Florida has a low DSH allotment, we allowed DSH to grow at the same rate

as the rest of the program. Table I.2 shows the waiver agreement, our

without-waiver projection, and the difference.

67The waiver agreement includes a circuit-breaker provision that allows Florida to eclipse the waiver

agreement cost cap in the event that the state’s traditional Medicaid population exceeds projections by

3 percent or more.

68OMB’s fiscal year 1995 projection did not include an estimate of current services growth for the year

2000. Because there was little variation in the projection from year to year, we used the 1999 figure for

2000.

Page 68 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Appendix I 

Objectives, Scope, and Methodology

Table I.2: Comparison of Florida

Waiver Spending Agreement Cap and

Projected Without-Waiver

Spending—Year by Year

Dollars in billions

1995 1996 1997 1998 1999 2000

Waiver

spending

cap $4.950 $5.723 $6.605 $7.582 $8.658 $9.8872

Percent

growth 16.3 15.6 15.4 14.8 14.2 14.2

Withoutwaiver

spending $4.706 $5.282 $5.931 $6.653 $7.430 $8.297

Percent

growth 10.6 12.2 12.3 12.2 11.7 11.7

Differenceexcess

funds $0.061 $0.442 $0.675 $0.929 $1.228 $1.193

The Florida waiver program was scheduled to begin in the fourth quarter

of 1995 and end after the third quarter of 2000. To calculate our

without-waiver projection and the waiver agreement spending cap, we

assumed the program would run for a full year in 1995 and 2000, but only

counted 25 percent of 1995 and 75 percent of 2000 for our calculation of

additional funds. We did this to avoid skewing the increases in the first

and last years of the program.

Oregon The Oregon waiver agreement includes per capita cost limits, rather than

an aggregate program cost cap. The agreement specifies per capita cost

limits for individual eligibility groups, with a limit on the number of new

eligibles.69 Consequently, our analysis represents the waiver agreement

limit based on a fixed set of enrollment assumptions, including both the

number and distribution of health plan enrollees. We calculated the

program cost using the agreed-upon per capita costs for each eligible

population and the enrollment estimates provided by the state.70

The waiver agreement documents for Oregon did not include a base-year

cost that we could adjust for inflation at the current services rates to

69The waiver agreement stipulates that the federal government will match state funds spent to provide

coverage for newly eligible enrollees. However, the federal government will only provide matching

funds for a limited number of new eligibles—based on the fixed ratio of current-to-new eligibles

specified in the waiver agreement.

70We could not calculate the maximum waiver agreement limit with any other estimate of enrollment

because, to date, HCFA and Oregon have not agreed on a specific methodology for determining the

maximum allowable number of newly eligible enrollees in each category that will qualify for federal

matching funds.

Page 69 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Appendix I 

Objectives, Scope, and Methodology

calculate without-waiver spending. Consequently, we constructed a

base-year cost that approximated the cost of providing traditional

Medicaid services to those individuals who would be eligible for the

Oregon waiver program using data supplied by the Oregon Office of

Medical Assistance Programs.71 Then, we adjusted this base-year cost for

inflation using OMB’s fiscal year 1994 current services projections to arrive

at our without-waiver projection for Oregon. Table I.3 shows the results of

these calculations.

Table I.3: Comparison of Oregon

Waiver Spending Agreement Cap and

Projected Without-Waiver

Spending—Year by Year

Dollars in billions

1994 1995 1996 1997 1998

Waiver spending cap $0.348 $0.476 $0.574 $0.610 $0.680

Percent growth 11.2 36.9 20.6 6.3 11.5

Without-waiver

spending $0.328 $0.413 $0.467 $0.524 $0.582

Percent growth 14.5 15.4 13.0 12.2 11.2

Differenceexcess funds $0.019 $0.063 $0.107 $0.086 $0.098

The Oregon waiver program was in operation for 11 months in 1994. To

account for this, we multiplied the waiver agreement and our

without-waiver projection by eleven-twelfths. As there was only a 1-month

difference, we did not extend our analysis into a sixth year (in this case,

1999) as we did with Florida and Hawaii.

Hawaii Like the Oregon agreement, the Hawaii waiver agreement is per capita

based, where the limit on total program spending is flexible—depending

on the number of traditional Medicaid eligibles enrolled—but the cost per

person in each eligibility group is fixed. However, with Hawaii, HCFA cost

sharing is based only on the number of traditional eligibles—including

hypotheticals; newly eligible individuals are not counted in calculating the

federal match.

In order to make our comparison, we used a preliminary estimate of the

base-year per capita cost and constructed a base-year enrollment figure

using actual enrollment figures for fiscal year 1992 and a state estimate for

fiscal year 1994. To calculate the total waiver agreement cost, we adjusted

71This exercise generally gave us the cost of providing Medicaid services to the waiver population on a

fee-for-service basis. A segment of the Oregon Medicaid population was already involved in a Medicaid

managed care experiment; we assumed that this experiment would continue unchanged and grow at

the same rate as the rest of the program.

Page 70 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Appendix I 

Objectives, Scope, and Methodology

the product of the base-year per capita cost and the state’s projected

enrollment by the waiver agreement inflation rate. The waiver agreement

inflation rate is the Consumer Price Index (CPI) for health care in Honolulu

plus 4 percentage points. However, because the Bureau of Labor Statistics

does not make CPI forecasts, we used an OMB nationwide projection as a

proxy for health care inflation in Honolulu.72

To project without-waiver spending, we multiplied the base-year per

capita cost figure by the base-year enrollment estimate and adjusted the

total for inflation at the rate specified by OMB’s fiscal year 1994 current

services projections. Table I.4 shows the results of these calculations.

Table I.4: Comparison of Hawaii

Waiver Agreement and Projected

Without-Waiver Spending—Year by

Year

Dollars in billions

1994 1995 1996 1997 1998 1999

Waiver

spending

cap $0.188 $0.216 $0.245 $0.280 $0.321 $0.367

Percent

growth 30.5 15.2 13.3 14.4 14.4 14.4

Withoutwaiver

spending $0.165 $0.190 $0.215 $0.241 $0.268 $0.298

Percent

growth 14.5 15.4 13.0 12.2 11.2 11.2

Differenceexcess

funds $0.012 $0.026 $0.027 $0.032 $0.040 $0.025

Hawaii’s waiver program started in mid-1994, and the demonstration is

scheduled to be completed in mid-1999. In creating table I.4, we

annualized the 1994 and 1999 figures and, as we did with Florida, we

multiplied the amount of additional funds by the fraction of the year the

program was (or will be) in operation.

72In a previous report, we found that per capita health care expenditures in Hawaii, while lower than

those in the nation as a whole, were growing at roughly the same rate as the rest of the nation. See

Health Care in Hawaii: Implications for National Reform (GAO/HEHS-94-68, Feb. 11, 1994).

Page 71 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Appendix II 

Overview of Medicaid

Financed jointly by the federal government and states, Medicaid is the

nation’s health care lifeline for two statutorily defined groups of

low-income residents—families, primarily women and children; and the

aged, blind, and disabled. The federal government matches state

expenditures according to a prescribed formula, providing, on average, 58

cents of every dollar spent. In 1993, Medicaid expenditures for the

39 million beneficiaries enrolled in the 50 states and the District of

Columbia totaled $130 billion, up dramatically from just a decade ago.

In reality, Medicaid is not one, but 56 separate programs that differ

dramatically across states.73 While federal statute mandates who is eligible

for coverage and the broad categories of services that must be provided,

each participating state designs and administers its own program by

(1) setting certain income and asset eligibility requirements; (2) selecting

which optional groups and services to cover; and (3) determining the

scope of mandatory and optional services, for example, by limiting the

number of covered hospital days per year. As a result of this flexibility,

Medicaid is not available to everyone who is poor. In 1993, Medicaid

provided health care coverage to less than half of those with incomes

below the poverty level. HCFA, within HHS, monitors each state program for

compliance with federal regulations.

Medicaid costs have escalated sharply—tripling between 1985 and 1993,

while the number of beneficiaries increased by over 50 percent.

Expenditure growth outpaced changes in the Consumer Price Index as

well as national health and Medicare spending. Currently, Medicaid

accounts for about 6 percent of all federal outlays and 19 percent of state

spending. Medicaid nearly equals state expenditures for elementary and

secondary education combined, generally the largest segment of state

budgets.

A number of factors contributed to this rapid cost growth. Between 1984

and 1990, the Congress mandated coverage for certain low-income

groups—primarily pregnant women, children, and Medicare

beneficiaries—and allowed coverage of others at state option.74 Medical

price inflation, higher provider reimbursements, utilization growth, and an

increase in the number of eligibles due to the national recession also

played a role. The relative importance of each factor depends on the time

73All 50 states plus the District of Columbia, American Samoa, Guam, the Northern Mariana Islands,

Puerto Rico, and the Virgin Islands have Medicaid programs.

74See Medicaid: Spending Pressures Drive States Toward Program Reinvention (GAO/HEHS-95-122,

Apr. 4, 1995), p. 27.

Page 72 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Appendix II 

Overview of Medicaid

period selected. For example, in 1993 the Kaiser Commission reported that

enrollment, inflation, and increased use of services each accounted for

about one-third of the increase in expenditures from 1988 through 1991.75

The Urban Institute has attributed part of the cost growth to increased

enrollment resulting from the sharp downturn in the economy during that

time period.76

Figure II.1: Growth in Medicaid

Expenditures, 1985-1993 Percent Change

0

5

10

15

20

25

1985 1986 1987 1988 1989 1990 1991 1992 1993

Federal Fiscal Year

As shown in figure II.1, growth in Medicaid expenditures soared in 1991

and 1992. The most important cost driver during this period was creative

financing techniques typically adopted by some states to increase DSH

payments. DSH provides supplemental payments to hospitals serving a

large number of Medicaid and other low-income patients, thereby partially

offsetting costs not covered by either Medicaid, state charity care

programs, or private insurance. In 2 years, DSH grew from just under

$1 billion to over $17 billion and represented about $1 out of every $7

Medicaid spent on medical services. This rapid growth can be traced to

several legal but nonetheless questionable practices, including the use of

75The Medicaid Cost Explosion: Causes and Consequences (Baltimore, Md.: The Kaiser Commission on

the Future of Medicaid, Feb. 1993).

76Theresa A. Coughlin and others, “State Responses to the Medicaid Spending Crisis: 1988 to 1992,”

Journal of Health Politics, Policy, and Law, Vol. 19, No. 4 (Winter 1994).

Page 73 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Appendix II 

Overview of Medicaid

rebated provider taxes to gain federal match under DSH.

77 In some cases, a

portion of the federal matching funds was redirected to state general

revenues and spent on programs other than Medicaid. This swapping and

redirecting of revenues contributed greatly to Medicaid cost escalation. In

response to these practices, the Congress placed restrictions on DSH in

1991 and 1993, effectively capping the program and tying increases to the

overall growth in state Medicaid programs.

77For more detail on these state financing practices, see Medicaid: States Use Illusory Approaches to

Shift Program Costs to the Federal Government (GAO/HEHS-94-133, Aug. 1, 1994).

Page 74 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Appendix III 

Summary of Approved and Pending 1115

Medicaid Demonstration Waivers Submitted

Since 1992

Submission Approval Implementation/status

Approved demonstrations

Oregon Nov. 1992 Mar. 19, 1993 Feb. 1994

Hawaii Apr. 1993 July 16, 1993 Aug. 1994

Kentucky May 1993 Dec. 9, 1993 Suspended—not approved by state

legislature; new waiver proposal submitted

June 22, 1995

Tennessee June 1993 Nov. 18, 1993 Jan. 1994

Rhode Island July 1993 Nov. 1, 1993 Aug. 1994

Florida Feb. 1994 Sept. 15, 1994 Not approved by state legislature in session

ending May 1995

Ohio Mar. 1994 Jan. 17, 1995 State has decided not to implement

Massachusetts Apr. 1994 Apr. 24, 1995 Awaiting state legislative approval; expected

implementation in Jan. 1996

Minnesota July 1994 Apr. 27, 1995 July 1, 1995

Delaware July 1994 May 17, 1995 Approved by state legislature; scheduled to

begin Jan. 1996

Vermont Feb. 1995 July 31, 1995 Jan. 1, 1996

Provisionally approved

South Carolina Mar. 1994 Nov. 18, 1994 In Apr. 1995, state abandoned waiver and

shifted to a voluntary managed care strategy

Pending

New Hampshire June 1994 On hold, new proposal expected

Missouri June 1994 Amendment submitted Mar. 24, 1995

Illinois Sept. 1994 HCFA reviewing financing issues

Louisiana Jan. 1995 Finance plan rejected

Oklahoma Jan. 1995 HCFA reviewing proposal

New York Mar. 1995 HCFA reviewing proposal

Kansas Mar. 1995 HCFA reviewing proposal

Kentucky June 1995 HCFA reviewing proposal

Utah July 1995 HCFA reviewing proposal

Alabama July 1995 HCFA reviewing proposal

Texas Sept. 1995 HCFA reviewing proposal

Note: Information in table is as of October 6, 1995.

Page 75 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Appendix IV 

Differing State Health Reform Contexts

Tennessee Florida Kentucky Oregon Hawaii Minnesota U.S. total

Access to insurancea

Uninsured

(percent of

nonelderly),

1993c

15.6% 24.1% 14.7% 17.2% 13.7%b 12.7% 18.1%

Insured by

employer

(percent of

nonelderly),

1993c

58.7% 52.8% 58.7% 63.9% 68.8% 66.7% 60.8%

Medicaid

coverage

(percent of

nonelderly),

1993c

16.0% 13.3% 18.4% 9.3% 9.4% 11.3% 12.8%

Individuals in

poverty (percent

of total

population),

1993

19.6% 17.8% 20.4% 11.8% 8.0% 11.6% 15.1%

State health care reform agenda

Universal

coverage goal

No Yes No Yes Yes Yes

Universal

coverage

financing

mechanism

Not applicable. Voluntary—to

be

reconsidered if

no evidence of

significant

decline in

uninsured.

Not applicable. Employer

mandate to

begin in 1997

if voluntary

participation

falls short of

goals.

Employer

mandate

enacted in

1974.d

Individual

mandate had

been

considered; no

consensus on

an alternative

has emerged.

Legislatively

established

state health

reform policy

organization

No Agency for

Health Care

Administration

(1992)

Health Care

Policy Board

(1994)

Health

Services

Commission

(1989)e

No Health Care

Commission

(1992)

Small group

insurance

reforms

Yes Yes Yes Yes No Yes

Publicly

sponsored

health

purchasing

cooperative

No Yes Yes No No Yes

High-risk

insurance pool

Yes Yes No Yes No Yes

(continued)

Page 76 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Appendix IV 

Differing State Health Reform Contexts

Tennessee Florida Kentucky Oregon Hawaii Minnesota U.S. total

Coverage expansions pursued by state prior to 1115 waiver

State subsidized

insurance

programs for

lower income

residents

No No No No Yes,

individuals up

to 300% of

poverty level.

Yes, families

with children

up to 275% of

poverty level

and individuals

up to 125% of

poverty level.

Optional

Medicaid

coverage to

pregnant

women and

infants over

133% of poverty

level

Up to 185% of

poverty level.

Up to 185% of

poverty level.

Up to 185% of

poverty level.

No Up to 185% of

poverty level.

Expanded

beyond 185%

of poverty

level; see next

row.

Optional

Medicaid

coverage

expansion under

1902(r)(2)

No No No No No Yes, pregnant

women up to

275% of

poverty level

and children

up to age 1.

Managed care penetration

HMO enrollment

(percent of

population),

1993

5.7% 17.6% 6.6% 31.5% 22.3% 30.1% 17.4%

Previous Medicaid managed care experience

Type of program Substate

managed care

waiver under

1915(b).

Renewal

denied in 1992.

Voluntary HMO

enrollment

since 1981,

and substate

physician

gatekeeper

program under

1915(b)

implemented

in 1991.f

Statewide

managed care

program under

1915(b)

implemented

in 1986.

Substate

managed care

program under

1915(b)

implemented

in 1985.

Substate

managed care

waiver under

1915(b) 

implemented

in 1983.

Voluntary HMO

enrollment

starting in late

1970s and

substate

managed care

program under

1115 waiver

implemented

in 1985.

Managed care

enrollment as

percent of

Medicaid

population, 1993

2.7% 17.3% 45.8% 22.7% 3.2% 18.1% 12.4%

Managed care

approach

HMO and

physician

gatekeeper

HMO and

physician

gatekeeper

Physician

gatekeeper

HMO and

partially

capitated

health plans

HMO HMO

(continued)

Page 77 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Appendix IV 

Differing State Health Reform Contexts

Tennessee Florida Kentucky Oregon Hawaii Minnesota U.S. total

Categories of

traditional

Medicaid

population

enrolled

Women and

children

Primarily

women and

children, but a

small number

of aged, blind,

and disabledf

Women and

children

Women and

children

Women and

children

Women,

children, and

elderly

1115 waiver managed care approach

Managed care

enrollment as

percent of

Medicaid

population, 1995

100% Not yet

implemented

1115 not

implemented,

but 1915(b)

enrollment is

57%

Approximately

80%g

84% Approximately

33%

Categories of

traditional

Medicaid

population

enrolled

Women,

children, aged,

blind, and

disabled

Women,

children, aged,

blind, and

disabled

Women and

children

Women,

children, aged,

blind, and

disabled

Women and

children

Women,

children, and

aged.

Managed care

approach

Capitated

HMOs and

PPOs

Traditional

eligibles:

choice of

capitated HMO

or physician

gatekeeper.

New elgibles:

choice of

indemnity and

HMO plans

offered by

statesponsored

health

alliances.

Physician

gatekeeper,

phasing into

capitated

plans.

Capitated

HMO-style

plans, some

partially

capitated

plans, and

some

physician

gatekeeper

programs.

Capitated

HMOs and

PPOs

Capitated

HMOs

(Table notes on next page)

Page 78 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Appendix IV 

Differing State Health Reform Contexts

aNumbers in bold indicate that amount is greater than the national average.

bUnlike most of the country, Hawaii is experiencing an economic downturn and an associated rise

in unemployment and the number of uninsured. In 1992, Hawaii’s percentage of uninsured was

reported to be 8.1 percent—the lowest in the nation.

cData are from Employee Benefit Research Institute, Sources of Health Insurance and

Characteristics of the Uninsured, Analysis of the March 1994 Current Population Survey, Issue

Brief Number 158 (Washington, D.C.: Feb. 1995).

dHawaii was the first state to attempt universal coverage with its passage of the Prepaid Health

Care Act in 1974, which implemented a limited employer mandate. Because this act was passed

before ERISA, Hawaii is the only state granted an exemption under ERISA. In addition, the state

established publicly funded programs to insure individuals not covered by the employer

mandate.

ePrepares prioritized list for legislative consideration, that is, ranks health services from most to

least important.

f

Florida has had authority to implement its 1915(b) waiver program statewide since 1993, but as

of August 1995 the program was still limited to specific geographic areas of the state. It expects

to enroll all traditional medicaid recipients (with the exception of those beneficiaries who are also

eligible for Medicare) in either the voluntary HMO program or its physician gatekeeper program

by June 1996. A small number of aged, blind, and disabled beneficiaries have been enrolled in

the state’s voluntary HMO program since 1981. However, as of August 1995, the enrollment of

this population in the physician gatekeeper program was limited to two pilot areas.

gThough Oregon’s goal is to transition all recipients into managed care, 20 percent remain in

fee-for-service because there are no appropriate providers in their area or the most appropriate

provider is not on the network of any participating managed care plan.

Page 79 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Appendix V 

Comments From the Department of Health

and Human Services

Page 80 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Appendix V 

Comments From the Department of Health

and Human Services

Page 81 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Appendix V 

Comments From the Department of Health

and Human Services

Page 82 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Appendix V 

Comments From the Department of Health

and Human Services

Page 83 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Appendix V 

Comments From the Department of Health

and Human Services

Page 84 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Appendix VI 

Major Contributors to This Report

Michael Gutowski, Assistant Director, (202) 512-7128

Walter Ochinko, Senior Health Policy Analyst, (202) 512-7157

Cheryl Williams, Senior Health Policy Analyst

Mark Ulanowicz, Health Policy Analyst

Page 85 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Glossary

Budget Neutrality An assessment of whether the cost of expanding coverage to additional

recipients under an 1115 Medicaid waiver is equal to or less than the cost

of continuing the original Medicaid program serving only those

traditionally eligible.

Current Services A cost projection that assumes Medicaid spending will continue

unchanged except for increases resulting from medical inflation, normal

growth in the eligible population, and changes in utilization of medical

services.

Terms and Conditions The culmination of negotiations between a state and the administration

over an 1115 demonstration application in which the administration

specifies the provisions of the Social Security Act that are being waived

and any special conditions upon which implementation of the waiver is

contingent, including how budget neutrality will be measured and

enforced over the life of the demonstration.

Waiver Funding Agreement The portion of the terms and conditions governing an 1115 demonstration

that spells out the limit (cap) on federal matching funds available during

the demonstration.

Disproportionate Share

Hospital Program (DSH)

A program that provides supplemental payments to hospitals serving a

large number of Medicaid and other low-income patients, thereby

offsetting costs not covered by either Medicaid, state charity care

programs, or private insurance. Eliminating or limiting payments from this

program is a major funding source for coverage expansion under 1115

waivers in states with high DSH allotments.

Managed Care An umbrella term encompassing types of health insurance coverage with

some insurer control over the use of services and restrictions on the

choice of physicians and hospitals. In the context of Medicaid, it includes

arrangements in which the insurer is paid a single fee, in advance, for each

beneficiary rather than the state reimbursing providers after the fact for

each service provided.

Page 86 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
Glossary

New Eligibles Primarily lower income, uninsured individuals not traditionally eligible for

Medicaid who are being provided health care coverage under 1115

waivers.

Traditional Eligibles The specified categories of persons eligible for Medicaid according to

statute: low-income families, primarily women and children; and the aged,

blind, and disabled, depending on their financial status.

(108200) Page 87 GAO/HEHS-96-44 Medicaid 1115 Demonstrations
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