MEDICAID 

DEMONSTRATION 

WAIVERS

Approval Process 

Raises Cost Concerns 

and Lacks 

Transparency

Report to the Ranking Member, 

Committee on Finance, U.S. Senate

June 2013

GAO-13-384

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-13-384, a report to the 

Ranking Member, Committee on Finance, 

U.S. Senate

June 2013

MEDICAID DEMONSTRATION WAIVERS

Approval Process Raises Cost Concerns and Lacks 

Transparency

Why GAO Did This Study

Medicaid, a $436 billion federal and 

state health care program for lowincome individuals and families, is a 

significant and growing expenditure. 

Section 1115 of the Social Security Act 

authorizes the Secretary of Health and 

Human Services to waive certain 

Medicaid requirements and allow 

otherwise uncovered costs for 

demonstration projects that are likely to 

promote Medicaid objectives. By HHS 

policy, these demonstrations should be 

budget neutral, that is, not increase 

federal spending over what it would 

have been if the state’s existing 

program had continued. States 

estimate what their spending would 

have been without the demonstration, 

and HHS approves a spending based 

on projected spending.

GAO was asked to review HHS 

approval of recent Medicaid section 

1115 demonstrations. GAO examined 

(1) the purpose of new demonstrations, 

and (2) the extent to which HHS’s 

policy and process for reviewing 

proposed demonstration spending 

provide assurances that federal costs 

will not increase. For 10 new 

comprehensive demonstrations 

approved from January 2007 through 

May 2012, GAO reviewed application, 

approval, and budget neutrality 

documents provided by HHS; 

calculated estimated spending limits; 

and interviewed HHS officials.

What GAO Recommends

GAO recommends that HHS update its 

budget neutrality policy and reexamine 

spending limits for the Arizona and 

Texas demonstrations. HHS disagreed 

with GAO’s recommendations. GAO 

believes these steps are needed to 

improve the budget neutrality process. 

What GAO Found

The 10 new demonstrations GAO examined expanded states’ use of federal 

funds and implemented new coverage strategies. Arizona and Texas established 

funding pools to make new supplemental payments beyond what they could have 

made under traditional Medicaid requirements and receive federal matching 

funds for the payments. All 10 demonstrations were approved to use different 

coverage strategies or impose new cost sharing requirements, including limiting 

benefits or imposing deductibles for certain populations.

The Department of Health and Human Services’ (HHS) budget neutrality policy 

and process did not provide assurances that all recently approved 

demonstrations will be budget neutral. For 4 of 10 demonstrations GAO 

reviewed, HHS approved spending limits that were based on assumptions of cost 

growth that were higher than its benchmark rates, and that, in some cases, 

included costs states never incurred in their base year spending. HHS’s 

benchmark growth rates are the lower of the state’s recent growth rates or 

projections for Medicaid program growth nationwide. For example, HHS 

approved a spending limit for Arizona’s demonstration using outdated information 

on spending—1982 data that was projected forward—that reflected significantly 

higher spending than what the state’s Medicaid program had actually cost. For 

Texas, HHS approved a spending limit using a base year that included billions in 

costs the state had not incurred. GAO found limited support and documentation 

for the higher-than-benchmark limits HHS approved. If HHS had held the 

4 demonstrations’ spending to levels suggested by its policy, the 5-year spending 

limits would have been an estimated $32 billion lower than what was approved; 

the estimated federal share of this reduction would be about $21 billion. 

Comparison of 5-Year Medicaid Spending Limits as Approved by the Department of Health 

and Human Services (HHS) and as Estimated Using Benchmark Growth Rates and Actual 

Costs for Selected Demonstrations Approved between January 2007 and May 2012

Dollars in millions, federal and state spending

State HHS-approved

GAO estimate using 

benchmark growth rates 

and actual costs Difference

Arizona $72,679 $46,382 $26,297

Indiana 10,626 10,211 416

Rhode Island 12,075 11,303 772

Texas 142,394 137,987 4,567

Total $237,774 $205,723 $32,051

Source: GAO analysis of HHS data.

For 6 other demonstrations, the approved spending limits reflected the states’ 

actual historical costs or criteria that were specified in law, which HHS followed. 

In examining HHS’s current written budget neutrality policy, GAO found that the 

policy is outdated and does not include a process for assuring the reliability of the 

data used to set spending limits. GAO has previously suggested that Congress 

require HHS to improve its budget neutrality process, in part, by improving the 

review criteria and methods, and by documenting and making clear the basis for 

approved limits. In addition to these suggestions, GAO believes HHS needs to 

take further actions to address the findings in this report.

View GAO-13-384. For more information, 

contact Katherine Iritani at (202) 512-7114 or 

iritanik@gao.gov.
Page i GAO-13-384 Medicaid Demonstration Waivers

Letter 1 

Background 5

New Demonstrations Allowed States to Change How They Used 

Federal Funds, and to Implement New Coverage Strategies 11

For 4 of 10 Reviewed Demonstrations, HHS’s Policy and Process 

for Approving Spending Limits Did Not Provide Assurances That 

Demonstrations Will Not Increase Federal Costs 22

Conclusions 32

Recommendations for Executive Action 33

Agency Comments and Our Evaluation 33

Appendix I Summary of Submitted and Reviewed Applications for 

Comprehensive Section 1115 Medicaid Demonstrations 36

Appendix II A Summary of Key Features of Recent Demonstrations 40

Appendix III Comments from the Department of Health and Human 

Services 48

Appendix IV GAO Contact and Staff Acknowledgments 53

Related GAO Products 54

Tables

Table 1: Comparison of 5-Year Medicaid Spending Limits Approved 

by the Department of Health and Human Services (HHS) 

and Estimated Spending Limits Using Benchmark Growth 

Rates and Actual Costs 23

Table 2: Comparison of Growth Rates Approved by the Department 

of Health and Human Services (HHS) for the Arizona 

Medicaid Demonstration and Benchmark Growth Rates 25

Contents 
Page ii GAO-13-384 Medicaid Demonstration Waivers

Table 3: Comparison of Growth Rates Approved by the Department 

of Health and Human Services (HHS) for the Indiana 

Medicaid Demonstration and Benchmark Growth Rates 27

Table 4: National and State-Historical Growth Rates that the 

Department of Health and Human Services (HHS) 

Compared in Selecting a Base Year and Approving the 

Rhode Island Medicaid Demonstration 27

Table 5: Status of Comprehensive Section 1115 Medicaid 

Demonstration Applications, by State, Submitted to the 

Department of Health and Human Services (HHS) from 

January 2007 through May 2012 37

Figure

Figure 1: Overview of the Department of Health and Human 

Services’ (HHS) Process for Projecting the Future Cost of 

a State’s Existing Medicaid Program 10
Page iii GAO-13-384 Medicaid Demonstration Waivers

Abbreviations

CHIP State Children’s Health Insurance Program

CHIPRA Children’s Health Insurance Program Reauthorization Act

 of 2009

CMS Centers for Medicare & Medicaid Services

DSH Disproportionate Share Hospital

DSRIP Delivery System Reform Incentive Payment

FMAP Federal Medical Assistance Percentage

FPL federal poverty level

HHS Department of Health and Human Services

HIP Healthy Indiana Plan

OMB Office of Management and Budget

PPACA Patient Protection and Affordable Care Act

SNCP Safety Net Care Pool

UC Uncompensated Care

UPL Upper Payment Limit

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Page 1 GAO-13-384 Medicaid Demonstration Waivers

441 G St. N.W.

Washington, DC 20548

June 25, 2013

The Honorable Orrin G. Hatch

Ranking Member

Committee on Finance

United States Senate

Dear Senator Hatch: 

The Medicaid program—a $436 billion joint federal-state program that 

finances health care coverage for low-income populations, including 

children and aged or disabled adults—involves significant and growing 

expenditures for the federal government and states. Under section 1115

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

may waive certain federal Medicaid requirements and allow costs that 

would not otherwise be covered for experimental, pilot, or demonstration 

projects that are likely to promote Medicaid objectives.1 These 

demonstrations also allow states to test and evaluate new approaches for 

delivering Medicaid services.2

Under Department of Health and Human Services (HHS) policy, section 

1115 demonstrations should not be approved unless they are budget 

neutral to the federal government; that is, the federal government will 

spend no more under a state’s demonstration than it would have spent 

In fiscal year 2011, $57.5 billion in federal 

funds, or about one-fifth of the $260 billion in federal Medicaid 

expenditures, were for services, coverage initiatives, and delivery system 

redesigns provided under section 1115 demonstrations in 40 states. For 

10 of these states, more than half of their total federal Medicaid 

expenditures were for section 1115 demonstrations.

 

1

42 U.S.C. § 1315(a). In this report, we refer to these Medicaid demonstrations as “section 

1115 demonstrations” or “demonstrations.” 

2

Although the Secretary of Health and Human Services has delegated the administration 

of the Medicaid program, including the approval of section 1115 demonstrations, to the 

Centers for Medicare & Medicaid Services (CMS), we refer to HHS throughout this report 

because section 1115 demonstration authority ultimately resides with the Secretary. Other 

HHS offices and agencies may be involved in the review and approval of these 

demonstrations.

 
 

Page 2 GAO-13-384 Medicaid Demonstration Waivers

without the demonstration.3 Budget neutrality generally is not a statutory 

requirement; however, HHS’s policy requires states to show that their 

demonstrations will be budget neutral as part of their application to HHS. 

Once approved, each demonstration operates under a negotiated budget 

neutrality agreement that places a limit on federal Medicaid spending over 

the life of the demonstration. In assessing a state’s projected spending 

limit, HHS’s policy calls for using estimates of growth that are the lower 

of: (1) the state’s historical growth for Medicaid in recent years, or 

(2) the President’s budget Medicaid trend rate projected for the nation. 

The lower rate is referred to as the benchmark growth rate.4

We have had long-standing concerns with HHS’s policy, process, and 

criteria for reviewing and approving section 1115 demonstrations, 

including the absence of a federal process for obtaining public input and a 

lack of transparency in the basis for approved spending limits.5

 

3

HHS has implemented a budget neutrality policy for section 1115 demonstrations since 

the 1980’s. The most recent version of this policy was published in 2001. In this report, we 

refer to this budget neutrality policy as “HHS’s policy.” 

For 

example, we previously found that although some demonstrations had the 

potential to significantly affect beneficiaries, advocates and others had not 

had an opportunity to review and provide input prior to the 

demonstrations’ approval. In recent years, Congress and HHS, however, 

have taken significant steps to improve the review and approval process, 

by establishing a public input process at the federal level before 

4

In this report we refer to the President’s budget Medicaid trend rate as the national 

growth rate.

5

GAO, Medicaid Section 1115 Waivers: Flexible Approach to Approving Demonstrations 

Could Increase Federal Costs, GAO/HEHS-96-44 (Washington, D.C.: Nov. 8, 1995); 

Medicaid and SCHIP: Recent HHS Approvals of Demonstration Waiver Projects Raise 

Concerns, GAO-02-817 (Washington, D.C.: July 12, 2002); Medicaid Waivers: HHS 

Approvals of Pharmacy Plus Demonstrations Continue to Raise Cost and Oversight 

Concerns, GAO-04-480 (Washington, D.C.: June 30, 2004); Medicaid Demonstration 

Waivers: Lack of Opportunity for Public Input during Federal Approval Process Still a 

Concern, GAO-07-694R (Washington, D.C.: July 24, 2007); Medicaid Demonstration 

Waivers: Recent HHS Approvals Continue to Raise Cost and Oversight Concerns, 

GAO-08-87 (Washington, D.C.: Jan. 31, 2008). Since 2003 Medicaid has been on our list 

of high-risk programs in part because of concerns about inadequate fiscal oversight, 

including oversight of section 1115 demonstrations. A list of related GAO reports appears 

at the end of this report.
 

Page 3 GAO-13-384 Medicaid Demonstration Waivers

demonstrations are approved.6 We have also reported that HHS had 

approved spending limits that included impermissible costs in the 

baselines, that included hypothetical costs in the baselines, or that 

exceeded benchmark growth rates. As a result of these findings, we 

made recommendations to HHS in 2002 and 2004 to take certain steps to 

improve the budget neutrality process, such as (1) clarifying the criteria 

for reviewing and approving states’ demonstration spending limits, 

(2) better ensuring that valid methods are used to demonstrate budget 

neutrality, and (3) documenting material explaining the basis for any 

approvals and making the material public.7 In a 2008 report, because 

HHS disagreed with these recommendations, we suggested that 

Congress consider requiring that HHS take these actions to improve the 

section 1115 demonstration review process.8

You expressed interest in the section 1115 demonstrations approved by 

HHS since we last reviewed selected demonstrations, which were 

approved from July 2004 through December 2006.

These issues, however, 

have not yet been addressed.

9

To describe the purpose of new comprehensive demonstrations HHS has 

approved since 2007, we reviewed all those approved from January 2007 

through May 2012 and that were still operating in May 2012. We excluded 

demonstrations that were extensions and amendments of previously 

approved demonstrations and those that were not comprehensive, that is, 

For this report, we 

reviewed a selection of new comprehensive section 1115 demonstration 

proposals approved since 2007 for (1) the purpose of the demonstrations, 

and (2) the extent to which HHS’s policy and process for reviewing 

proposed spending under the demonstrations provides assurances that 

federal costs will not increase.

 

6

The Patient Protection and Affordable Care Act (PPACA) required the Secretary of 

Health and Human Services to issue regulations for section 1115 applications and 

extensions that address certain topics including a state and federal public notice and 

comment process, submission of reports on implementation by states and periodic 

evaluation by HHS. In response, on February 27, 2012, HHS published final regulations 

establishing these requirements for new section 1115 Medicaid demonstration 

applications and extensions. Pub. L. No. 111-148, § 10201, 124 Stat.119, 922 (2010); 

77 Fed. Reg. 11,678 (Feb. 27, 2012).

7

GAO-02-817, GAO-04-480. 

8

GAO-08-87. 

9

GAO-08-87. 
 

Page 4 GAO-13-384 Medicaid Demonstration Waivers

they were limited to one category of services. We also excluded 

demonstrations that extended coverage to new populations in response 

to Medicaid expansion, which can begin in 2014 under the Patient 

Protection and Affordable Care Act (PPACA).10 We identified 

demonstrations submitted by 10 states that met these criteria: Arizona, 

the District of Columbia, Idaho, Indiana, Michigan, Missouri, New Mexico, 

Rhode Island, Texas, and Wisconsin.11 We reviewed application and 

approval documents for each demonstration, and interviewed HHS 

officials.12

To assess the extent to which HHS’s policy and process provides 

assurances that federal costs will not increase over what they would have 

been in the absence of the demonstration, we reviewed HHS’s policy. We 

also reviewed the documentation for the 10 new comprehensive 

demonstrations selected for the first objective and budget neutrality 

analyses prepared by the states and submitted to HHS. We examined the 

basis of HHS’s approved federal and state combined spending limit for 

each demonstration, and determined whether HHS followed its policy for 

determining budget neutrality. We then compared the spending limits 

approved by HHS with our estimates of the spending limits. We 

calculated our estimate of the spending limits in accordance with HHS’s 

policy by using the most recent year of expenditures provided by the state 

We used certain characteristics to describe the purpose of the 

demonstrations, such as whether the demonstrations changed how the 

states used federal funds, expanded Medicaid coverage to a new 

population of beneficiaries, and implemented new cost sharing 

requirements.

 

10PPACA provides for the expansion of Medicaid eligibility to nonelderly individuals whose 

household income does not exceed 133 percent of the federal poverty level (FPL). 

PPACA also imposes a 5 percent income disregard when calculating modified adjusted 

gross income for determining Medicaid eligibility, which effectively increases this income 

level to 138 percent of the FPL for this population. Pub. L. No. 111-148, §§ 2001(a)(1), 

2002(a), 124 Stat. 119, 271, 279, as amended by Pub. L. No. 111-152, § 1004(e), 124 

Stat. 1029, 1034 (2010). This expansion is estimated to result in the enrollment of an 

additional 7 million individuals in 2014. Accordingly, beginning in 2014, states may provide 

coverage of these adults under their state plan as opposed to under a section 1115 

demonstration.

11In this report, we use the term “state” to refer to the 50 states and the District of 

Columbia.

12We did not review the implementation of these demonstrations after they were 

approved. In addition, we reviewed documentation related to amendments, when 

necessary.
 

Page 5 GAO-13-384 Medicaid Demonstration Waivers

for the base year, and the lower of either the state’s historical average 

cost growth rate or the estimate of the Medicaid national growth rate 

developed by the Centers for Medicare & Medicaid Services (CMS) 

actuary. We then estimated the federal share of the spending limits using 

the 2012 Federal Medical Assistance Percentage (FMAP) for each 

state.13

We conducted this performance audit from June 2012 to June 2013 in 

accordance with generally accepted government auditing standards. 

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

sufficient, appropriate evidence to provide a reasonable basis for our 

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

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives. 

In our assessment, we did not trace the underlying spending and 

enrollment data used to develop spending limits to source documentation 

on spending or determine whether the baseline expenditures included 

impermissible costs. To the extent baseline spending or enrollment were 

overstated or understated, our estimates of benchmark spending limits 

could also be overstated or understated. We determined that the data 

were sufficiently reliable for the purpose of examining the information that 

HHS used in making its decisions about budget neutrality. To supplement 

our reviews, we interviewed HHS and Office of Management and Budget 

(OMB) officials about HHS’s policy and process for setting spending limits 

for demonstrations, the basis of the spending limits for the 10 

demonstrations, and the steps taken to ensure the quality of the data 

used to set spending limits. We did not obtain documentation from state 

officials or discuss demonstration proposals, approvals, and cost data 

with state officials.

Each state administers its Medicaid program in accordance with its own 

Medicaid plan, which determines the groups of individuals to be covered, 

services to be provided, methodologies for providers to be reimbursed, 

and the administrative requirements that states must meet. To receive 

federal matching dollars for services provided to Medicaid beneficiaries, 

each state must submit a Medicaid plan for review and approval by HHS. 

States must meet certain federal requirements, but have flexibility beyond 

 

13The federal government matches state Medicaid expenditures for most services 

according to the state’s FMAP. A state’s FMAP is calculated using a statutory formula 

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

Background 
 

Page 6 GAO-13-384 Medicaid Demonstration Waivers

these federal parameters. For example, states must cover certain 

“mandatory” populations and benefits, but they have the option of 

covering “optional” categories of individuals and benefits. Coverage of 

optional populations and benefits varies across the states.14 States may 

also choose from different delivery systems, such as fee-for-service or 

managed care.15

States pay health care providers for covered services provided to 

Medicaid beneficiaries based on provider claims for services rendered. 

States generally make two types of supplemental payments to certain 

providers—payments separate from and in addition to those made to 

providers using regular Medicaid payment rates. Under federal law, states 

are required to make Disproportionate Share Hospital (DSH) payments to 

hospitals that serve a disproportionate share of low-income and Medicaid 

patients, in addition to regular Medicaid payments. Hospitals are subject 

to an annual limit on DSH payments, defined as the hospitals’ 

uncompensated care costs for Medicaid and uninsured patients minus 

Medicaid payments, and payments made on behalf of uninsured 

patients.16 States also make other supplemental payments, which are 

often referred to as non-DSH supplemental payments or “Upper Payment 

Limit (UPL) payments” to providers such as hospitals and nursing homes. 

These payments are based on the difference between Medicaid 

payments for services using regular Medicaid payment rates and the 

UPL, which is the ceiling on federal reimbursement.17

 

14Nationally in 2007, optional populations accounted for about 30 percent of Medicaid 

enrollment and about 42 percent of all Medicaid spending in 2007; optional services 

accounted for about 33 percent of Medicaid expenditures.

In general, the use 

15Under a Medicaid managed care program, states contract with managed care 

organizations, to provide or arrange for medical services, and prospectively pay the plans 

a fixed monthly rate, or capitation payment, per enrollee. States receive federal 

reimbursement for capitation payments and the plans pay providers, such as hospitals 

and physicians, for services provided to Medicaid enrollees.

1642 U.S.C. § 1396r-4. In addition, under federal law, states may only claim federal 

matching funds for DSH payments made to qualifying hospitals up to the states’ DSH 

allotments. DSH allotments are based on a statutory formula and allotment amounts vary 

across the states.

17The UPL is based on a reasonable estimate of what Medicare—the federal health 

program that covers individuals aged 65 and over, individuals with end-stage renal 

disease, and certain disabled individuals—would pay for similar services. In addition, 

under UPL arrangements, payments are subject to aggregate limits by provider type, but 

there are not firm dollar limits on individual providers. See, for example, 42 C.F.R. 

§§ 447.272, 447.321.
 

Page 7 GAO-13-384 Medicaid Demonstration Waivers

of managed care to deliver Medicaid services precludes states from 

making UPL payments to providers because states are prohibited from 

making such payments for services provided under a managed care 

contract.18

Generally, the authority provided to the Secretary of Health and Human 

Services by section 1115 of the Social Security Act allows states to 

expand Medicaid coverage through demonstration projects to “expansion” 

populations that would not otherwise be eligible under traditional Medicaid 

programs. These demonstrations provide a way for states to innovate 

outside of many of Medicaid’s otherwise applicable requirements. For 

example, states may test ways to obtain savings or efficiencies in how 

they deliver services in order to cover expansion populations. Under a 

demonstration, states may also alter their Medicaid benefit package for 

categories of covered populations. Without this authority, states generally 

would be required to provide covered benefits in the same amount, 

duration, and scope to all beneficiaries covered under the state plan.

States may have more than one comprehensive demonstration. For 

example, New Jersey had one demonstration targeted at expanding 

coverage to uninsured childless adults, and a separate demonstration 

targeted at expanding coverage to uninsured parents of Medicaid-eligible 

children. Both these demonstrations are comprehensive because they 

provide a broad range of services to these populations. States may also 

administer a large portion of their Medicaid program under a 

demonstration. For example, in Vermont, nearly all of the state’s Medicaid 

expenditures in fiscal year 2011 were for costs associated with a 

demonstration.

Generally, to extend Medicaid to any previously uncovered populations or 

receive federal Medicaid matching funds for otherwise unallowable costs 

under the terms of a section 1115 demonstration, states must establish 

that the demonstration is budget neutral. To do so, states must show that 

their plans for changing their Medicaid program will generate savings to 

 

18Federal regulations prohibit payments by a state Medicaid agency to providers for 

services rendered under a contract with managed care organizations, with the exception 

of DSH and graduate medical education payments. This prohibition extends to UPL 

payments. See 42 C.F.R. § 438.60.

Medicaid Section 1115 

Demonstrations 
 

Page 8 GAO-13-384 Medicaid Demonstration Waivers

Medicaid, or they must get approval for redirecting existing Medicaid 

funding to cover the expected costs of the demonstration. For example:

• States have expanded the population eligible for Medicaid coverage 

by implementing managed care. In these demonstrations, states 

established budget neutrality by showing they would achieve savings 

from enrollment in managed care that could be used to cover new 

populations under the demonstration.

• States also have been approved by HHS to redirect certain categories 

of federal Medicaid funding for new purposes under the 

demonstration. Specifically, states have received approval to use all 

or a portion of their DSH allotments to cover previously ineligible 

individuals and costs under their demonstrations.

• States also have expanded coverage to previously ineligible 

populations, but in order to maintain budget neutrality, have provided 

the expansion population with a reduced benefit package—such as 

not covering inpatient hospital care—as compared to the typical 

benefits provided to Medicaid beneficiaries. Other strategies have 

included imposing higher cost-sharing on services or capping 

enrollment for expansion populations.

States submit applications for section 1115 demonstrations to HHS. If 

HHS approves the demonstration, it is typically approved for a 5-year 

period.19

 

19As referenced above, in February 2012, HHS published a final rule that imposed new 

requirements for states seeking approval for section 1115 demonstrations. In 

implementing some of these requirements, in October 2012, HHS made available an 

interim template that states may use in submitting their applications for section 1115 

demonstrations. The application requirements are slightly different for new applications 

than for extensions. For example, applications for extensions must report evidence of how 

the objectives of the prior demonstration have or have not been met and must include an 

evaluation report with findings to date.

States that want to renew an existing demonstration have the 

option of requesting an extension or submitting an application for a new 

demonstration. States that submit an application for a new demonstration 

instead of an extension would need to terminate the existing 

demonstration, and would be required to notify beneficiaries of potential 

changes in coverage. A federal review team examines applications for 

both new demonstrations and extensions. The review team is led by CMS 

Review Responsibilities 

for Demonstrations
 

Page 9 GAO-13-384 Medicaid Demonstration Waivers

and includes representatives from OMB; from other agencies within HHS 

as applicable, such as the Substance Abuse and Mental Health Services 

Administration providing a review of waivers that affect mental health; and 

HHS Secretarial offices including the Assistant Secretary for Planning and 

Evaluation and the Assistant Secretary for Financial Resources. CMS’s 

Office of the Actuary provides nationwide data on projected Medicaid cost 

growth, but is not part of the federal review team. The federal review may 

consist of negotiations, including the exchange of questions and answers 

between the review team and the state. In approving applications, HHS 

might not approve all components of the states’ request contained in their 

applications. (See app. I for a discussion of applications that were 

submitted and reviewed between January 2007 and May 2012.)

According to HHS’s policy, spending limits are based on the projected 

cost of continuing states’ existing Medicaid programs without a 

demonstration. The higher the projected costs, the more federal funding 

states are eligible to receive. The spending limits can be either an annual 

per person limit or an aggregate spending limit that remains fixed for the 

entire length of the demonstration, or a combination of both. HHS policy 

states that demonstration spending limits will be calculated from two 

components:

• Spending base. States select a recently completed year that 

establishes base levels of expenditures for populations included in the 

proposed demonstration—a state’s “spending base.” States also 

identify beneficiary groups for inclusion in the proposed 

demonstration. For example, demonstrations may include beneficiary 

groups, such as aged, blind and disabled, or families with children. 

However, the spending base must exclude certain base year 

expenditures, such as impermissible provider payments.

• Growth rates. States should submit to HHS 5 years of historical data 

for per person costs and beneficiary enrollment in their existing 

Medicaid program. HHS’s policy states that spending limits should be 

based on a benchmark growth rate, which is the lower of statespecific historical growth or the estimates of nationwide growth for the 

beneficiary groups included in the demonstration.20

 

20HHS’s policy is specific to per person cost growth rates and does not explicitly address 

the application of enrollment growth rates; however, HHS considers state historical and 

nationwide enrollment growth rates in establishing spending limits.

The policy 

Determining Budget 

Neutrality for 

Demonstrations 
 

Page 10 GAO-13-384 Medicaid Demonstration Waivers

indicates that states, in providing HHS with state-specific historical 

growth rates, must also provide quantified explanations of any 

unusual changes in the trends. Nationwide projections of cost growth 

are developed by CMS actuaries to assist OMB in preparing the 

President’s budget. Growth rates for determining budget neutrality can 

vary for different eligibility groups. For example, the nationwide 

estimates of per capita cost growth in Medicaid for fiscal year 2012 

were 6.0 percent for children, 3.4 percent for aged individuals, 

2.6 percent for blind and disabled individuals, and 2.5 percent for 

adults.

Figure 1 illustrates steps used to set spending limits for proposed section 

1115 demonstrations.

Figure 1: Overview of the Department of Health and Human Services’ (HHS) 

Process for Projecting the Future Cost of a State’s Existing Medicaid Program

a

For example, a state may propose, that certain groups of beneficiaries, such as aged and disabled 

beneficiaries, will operate under the terms of the state’s approved state Medicaid plan rather than 

under the terms of the demonstration.
 

Page 11 GAO-13-384 Medicaid Demonstration Waivers

Some types of section 1115 demonstrations are not required to follow this 

process for determining spending limits. Specifically, for demonstrations 

that redirect a state’s federal DSH funding, HHS policy is to base the 

spending limit on the lower of the state’s DSH allotment or actual DSH 

expenditures prior to the demonstration.21 In addition, there is another 

group of recent section 1115 demonstrations pursuant to which federal 

law has defined how to calculate budget neutrality. Specifically, under the 

Children’s Health Insurance Program Reauthorization Act of 2009 

(CHIPRA), states with existing section 1115 demonstrations covering 

childless adults using State Children’s Health Insurance Program (CHIP) 

funding were required to end these projects.22 States, however, could 

apply and receive approval for new section 1115 demonstrations through 

which they could continue to cover childless adults using Medicaid funds. 

CHIPRA required that these new demonstrations be budget neutral, and 

required HHS to use a defined process of identifying the spending base 

and growth rates for demonstration spending limits.

The 10 new comprehensive section 1115 demonstrations we examined 

focused on implementing ways of using federal funds to pay for services 

not typically covered under Medicaid. All 10 demonstrations were 

approved to implement different coverage strategies or cost sharing for 

certain beneficiary populations. Appendix II provides a brief summary of 

the key features of 10 demonstrations. 

 

21DSH allotments are the maximum amount of federal DSH funding that is available for 

each state. They are based on a statutory formula, and allotment amounts vary across the 

states.

22CHIP is a joint federal state program to finance health coverage for children in families 

with income too high to qualify for Medicaid.

New Demonstrations 

Allowed States to 

Change How They 

Used Federal Funds, 

and to Implement 

New Coverage 

Strategies 
 

Page 12 GAO-13-384 Medicaid Demonstration Waivers

Two states we reviewed—Arizona and Texas—obtained the authority 

under their section 1115 demonstrations to establish funding pools for 

purposes of making supplemental payments and to receive federal 

matching funds for these payments.

As approved, Arizona’s section 1115 demonstration allows the state to 

make new types of supplemental payments to providers, and allowed the 

state to establish a funding pool from which these payments could be 

made. Arizona has operated a comprehensive section 1115 

demonstration for many years, under which the majority of the Medicaid 

population is enrolled in managed care. Under its previous demonstration, 

the state made DSH payments to hospitals, but did not make UPL 

payments to its providers because the majority of services were provided 

under managed care contracts. UPL payments for services provided 

under managed care are generally prohibited under federal regulations. In 

March 2011, the state requested to terminate its existing section 1115 

demonstration in order to limit coverage of certain adult populations.23

Under the demonstration, the state obtained the authority to claim federal 

matching funds for new types of supplemental payments made to 

providers from SNCP. The state did not commit any state funds for these 

supplemental payments and instead relied on the contributions of eligible 

government entities for the nonfederal share of payments. According to 

HHS officials, because these supplemental payments were created under 

the authority of the demonstration, they were not subject to certain federal 

requirements that would otherwise apply. For example, officials reported 

that they did not consider these to be DSH payments and therefore the 

Subsequently, the state received approval for a new demonstration that 

continued the existing managed care delivery system, granted the 

authority for the state to make new types of supplemental payments to 

providers through a Safety Net Care Pool (SNCP), and expanded 

coverage to certain populations.

 

23The state reported that due to budget constraints, it could not continue its program of 

providing coverage to certain adults. To end the coverage, the state had to terminate the 

demonstration under which the coverage was provided. The adults the state would no 

longer cover were those without dependent children with family income up to and 

including 100 percent of the FPL as well as adults with income in excess of 100 percent of 

the FPL who had qualifying healthcare costs that reduce their income to or below 

40 percent of the FPL.

HHS’s Approvals Allowed 

Two States to Establish 

Funding Pools to Make 

New Types of 

Supplemental Payments

Arizona Health Care Cost 

Containment System
 

Page 13 GAO-13-384 Medicaid Demonstration Waivers

federal reimbursement for SNCP payments exceeds the maximum 

amount Arizona is allowed to receive under its DSH allotment.24 They 

were not considered to be UPL payments and therefore could be made 

even when services were provided under a managed care contract.

According to HHS officials, the terms and conditions of the demonstration 

defined requirements for these payments. For example, under the terms 

and conditions, as the SNCP payments were Medicaid payments, HHS 

required they be subject to certain requirements when made to DSH 

hospitals. Specifically, SNCP payments received for inpatient or 

outpatient hospital costs were required to be counted against each 

hospital’s annual DSH payment limit.25

The terms and conditions of Arizona’s demonstration also included other 

federal requirements and limits for the SNCP payments. Specifically:

• For each year of the demonstration, the state was allowed to make up 

to $332 million—total federal and nonfederal funds—in payments to 

hospitals, clinics, and other nonhospital providers that have high 

levels of uncompensated care for medical services provided to 

Medicaid eligible and uninsured individuals.26 Demonstration 

requirements also limited these SNCP payments for individual 

providers’ to their costs of delivering services to Medicaid and 

uninsured individuals,27

 

24Arizona’s DSH allotment was capped at about $101 million in 2011.

and prohibited SNCP payments for 

nonemergency services provided to noncitizens who were not eligible 

for Medicaid.

25Under federal law, hospitals that qualify for DSH payments are subject to hospitalspecific limits, meaning hospitals have a calculated ceiling on the amount of DSH 

payments they may receive annually. Specifically, DSH payments to individual hospitals 

are limited to the hospital’s uncompensated care costs for Medicaid and uninsured 

patients minus Medicaid payments and payments made by or on behalf of uninsured 

patients.

26The demonstration’s terms and conditions identify 4 hospitals, 13 clinics, and 3 hospitalbased physicians groups as eligible to receive SNCP payments.

27The terms and conditions of the demonstration state that for any provider receiving an 

SNCP payment, the total of Medicaid payments, DSH payments, SNCP payments, and 

any other payments the provider received for medical services delivered to Medicaid and 

uninsured individuals cannot exceed the actual cost of providing the services.
 

Page 14 GAO-13-384 Medicaid Demonstration Waivers

• In addition to the $332 million, the state was allowed, for the first 

2 years of the demonstration, to make up to $20 million—total federal 

and nonfederal funds—in payments that were previously made under 

a state-funded health program. Specifically, the state was approved to 

make payments to hospital trauma centers, hospital emergency 

departments, and rural hospitals across the state for clinical, 

professional, and operational costs. These payments were intended to 

help hospitals manage their uncompensated care costs. Prior to the 

demonstration, these were entirely state-funded payments that 

Arizona voters approved in 2002.

Other features of Arizona’s demonstration included expanding coverage 

to two groups of children: children with family income at or below 

175 percent of the federal poverty level (FPL), who were not otherwise 

eligible for Medicaid; and children up to age 19 with incomes between 

100 and 200 percent of the FPL, who had access to employer sponsored 

health care coverage, and were not otherwise eligible for Medicaid. Total 

funding—federal and nonfederal funds—available for expansion was 

capped at about $77 million each year by the demonstration. The state 

was also allowed to extend the length of Medicaid coverage for 

postpartum women from the typical 60 days to 24 months. The total cost 

allowed for this program—federal and nonfederal—was $20 million.

Two of the purposes of the Texas section 1115 demonstration were to 

allow the state to expand its use of managed care statewide, and to 

authorize new supplemental payments through two new funding pools. 

Prior to the demonstration, the state provided services to most of the 

state’s Medicaid population on a fee-for-service basis. Under this system, 

hospitals provided services to Medicaid-covered individuals and then 

submitted bills to the state for reimbursement based on the state’s regular 

Medicaid payment rates. In addition, the state made DSH payments and 

UPL payments for hospital services provided on a fee-for-service basis.

Under the demonstration, HHS approved two new types of supplemental 

payments to be distributed through two funding pools. In creating these 

pools, the state did not commit any state funds and instead relied on the 

contributions of eligible government entities for the nonfederal share of 

Texas Healthcare 

Transformation and Quality 

Improvement Demonstration
 

Page 15 GAO-13-384 Medicaid Demonstration Waivers

payments.28 Under one pool, called the Uncompensated Care (UC) pool, 

the state could obtain federal matching funds on provider payments 

totaling up to $17.6 billion over the 5-year term of the demonstration.29

HHS officials told us that because the UC pool payments were created 

under the demonstration, they were not DSH or UPL payments and 

therefore were not subject to the federal requirements that govern those 

payments. Thus, as with Arizona, these payments were in addition to, and 

not limited by, the maximum cap on federal matching that was provided to 

the state under its DSH allotment.

Under the second pool, called the Delivery System Reform Incentive 

Payment (DSRIP) pool, the state could obtain federal matching funds on 

provider payments totaling up to $11.4 billion over the 5-year term of the 

demonstration. The demonstration significantly increased the amount of 

federal funding Texas could claim for the two new types of supplemental 

payments. For example, in fiscal year 2011—the year prior to the 

demonstration—the state claimed federal matching funds on about 

$2.6 billion in UPL payments. Under the demonstration, the state was 

authorized to receive federal matching funds on $4.2 billion in payments 

made in the first year of the demonstration and on $6.2 billion in 

payments made in each of the remaining 4 years of the demonstration.

30

 

28In order to qualify for these supplemental payments, providers needed to participate in a 

regional healthcare partnership that included local government entities or providers that 

could fund the nonfederal share of supplemental payments. These regional health care 

partnerships developed regional health plans that identified health care providers, 

community needs, and improvement projects to fund with supplemental payments.

Officials told us the UC pool 

payments also were not considered to be UPL payments and could be 

made for services provided to individuals enrolled in managed care. 

According to HHS, the terms and conditions of the demonstration 

established requirements and limits for the UC pool payments. Among 

other things, the terms and conditions required that these payments be 

limited to individual providers’ uncompensated costs of delivering services 

29Payments made from the UC pool in the first year of the demonstration were transition 

payments to hospitals and physician groups that previously received UPL payments under 

the Medicaid state plan for claims during fiscal year 2011. This transition period ensures 

that those providers are eligible to receive the level of Medicaid funding they received in 

prior years from UPL payments as the state developed how it would distribute funds from 

this pool under the demonstration.

30Texas’s DSH allotment was capped at about $957 million in 2011.
 

Page 16 GAO-13-384 Medicaid Demonstration Waivers

to Medicaid beneficiaries and uninsured individuals.31

The terms and conditions also established requirements for the DSRIP 

pool. According to these, the DSRIP pool was established to provide 

incentive payments to hospitals related to infrastructure and health care 

redesign changes as Texas prepared for the increase in Medicaid 

enrollment that was expected under PPACA beginning in 2014. The state 

received approval to make payments related to four main areas: 

(1) infrastructure development, which included hiring more physicians and 

the use of electronic health records systems at the provider level; 

(2) program innovation and redesign, which included implementing 

strategies, such as reducing inappropriate use of the emergency room 

and patient center care models; (3) quality improvements, which included 

interventions to reduce and manage chronic disease; and (4) populationfocused improvements, which included obtaining data to monitor changes 

in health status and measuring preventive health activities. Like the UC 

pool payments, HHS officials told us that these payments are not subject 

to federal requirements that would apply to DSH and UPL payments, and 

instead are governed solely by the terms and conditions of the 

demonstration.

Further, as with 

Arizona, because the UC pool payments were Medicaid payments, the 

payments for inpatient or outpatient hospital costs were required to be 

counted against the amount of DSH payments that an individual hospital 

could receive. The terms and conditions also allowed the state to make

these Medicaid supplemental payments to a variety of providers for 

serving Medicaid and uninsured individuals. These providers included 

physician-practice groups, government ambulance providers, government 

dental providers, and rural health providers with no public hospitals.

32

 

31Although the level of federal funding for these new supplemental payments was 

significantly increased, the UC pool payments were held to a facility cost-based standard 

for reimbursement rather than the state’s historic UPL program.

However, unlike UC pool payments, DSRIP payments 

are incentive payments and not reimbursement for providing health care 

services. Consequently, HHS does not require these payments to be 

32According to the terms and conditions, the state could not receive federal funding for 

expenditures from the DSRIP pool until key milestones are met including: HHS’s approval 

of the state’s plan for and status of forming regional health care partnerships; identification 

of the public hospitals directing each of these partnerships; and development of a list of 

projects related to the four main areas noted above. In addition, incentive payments from 

the pool would be based on successful completion of HHS-approved metrics submitted by 

the regional healthcare partnerships related to the four areas.
 

Page 17 GAO-13-384 Medicaid Demonstration Waivers

counted against the amount of DSH payments a hospital could receive 

under its hospital specific DSH limit.

The DSRIP payments were approved by HHS under the expectation that 

the state would be expanding its Medicaid coverage under PPACA; 

however, since the demonstration’s approval, the state has not confirmed 

that it intends to expand Medicaid to new populations allowed under 

PPACA. At the time Texas’s demonstration was approved, PPACA 

required all states to expand Medicaid coverage to a new mandatory 

category of low-income individuals, and states were eligible to receive 

enhanced federal funding for this population beginning in January of 

2014.33 However, subsequent to this approval, the U.S. Supreme Court 

ruled that any state that chooses not to expand Medicaid coverage will 

not be subject to a penalty of losing Medicaid funding for the entire 

program, and instead will only forego the enhanced funding for that 

population, therefore making the expansion a choice for the states.34 In 

June 2013, a state law was enacted that would prohibit the state Medicaid 

agency from expanding Medicaid coverage.35 In general, HHS can 

withdraw authorities to claim federal funding for expenditures under 

demonstrations in certain circumstances, including if it determines that 

the approval no longer promotes the objectives of the Medicaid program. 

However, HHS officials stated that the delivery system improvements that 

will result from the DSRIP pool payments will benefit low-income and 

Medicaid populations, whether the state expands Medicaid or not. HHS 

does not plan to revisit the terms and conditions of the Texas 

demonstration as it relates to the DSRIP pool, even if the state does not 

expand Medicaid as provided under PPACA.

 

33States that failed to provide Medicaid coverage to mandatory population categories were 

subject to the potential penalty of losing federal funding for their Medicaid program.

34See National Federation of Independent Business, et al., vs. Sebelius, Sec. of Health 

and Human Services, et al., 132 S. Ct. 2566 (U.S. June 28, 2012).

35Prior to this however, the Governor of Texas sent a letter to HHS in July 2012 stating 

that the state did not intend to expand Medicaid.
 

Page 18 GAO-13-384 Medicaid Demonstration Waivers

Indiana, the District of Columbia, Wisconsin, and Missouri were allowed 

to redirect all or a portion of their federal DSH allotment, primarily to cover 

populations made eligible for Medicaid under the terms of the 

demonstration. Three of the states—Indiana, the District of Columbia, and 

Wisconsin—were approved to use at least some of their DSH allotment 

solely for coverage expansion.

• Indiana was allowed to use a portion of its DSH allotment to pay for 

services for a new population of about 36,000 higher-income parents 

and childless adults.36

• The District of Columbia demonstration expanded full Medicaid 

coverage to childless adults with incomes higher than the income 

level that would qualify them for Medicaid coverage under PPACA 

beginning in 2014—over 133 percent of the FPL. Individuals in this 

expansion population were previously covered under a local program 

for which the District of Columbia did not receive federal matching 

funds.37

• Wisconsin was approved to expand its plan to an estimated 35,000 

childless adults, providing them with benefits, such as physician and 

hospital services.

The fourth state, Missouri, was also approved to redirect a portion of its 

DSH allotment for new purposes established under the demonstration, 

including, among other things, providing coverage to previously ineligible 

populations. Missouri was also allowed to redirect a portion of its DSH 

funds for payments for other purposes, as authorized under the 

demonstration, including

 

36These adults included uninsured adults who are custodial parents and caretakers of 

children eligible for Medicaid and CHIP. Also included were noncustodial parents or 

childless adults, ages 19 through 64 with family incomes up to and including 200 percent 

of the FPL who were not otherwise eligible for Medicaid or Medicare, who did not have 

access to an employer-sponsored health plan, had been uninsured for 6 months, and 

whose health care expenditures did not exceed a $1 million lifetime maximum on benefits 

under the demonstration. The demonstration also allowed the continued coverage of 

about 600,000 Medicaid enrollees.

37Under the previous program enrollees did not receive mental health and transportation 

benefits and they had a limited pharmacy network.

HHS Approvals Allowed 

Four States to Redirect 

DSH Funds Primarily to 

Expand Coverage to New 

Populations 
 

Page 19 GAO-13-384 Medicaid Demonstration Waivers

• payments to health clinics that provided ambulatory services to 

uninsured and indigent populations in and near St. Louis;38

• payments for administrative costs—nonhospital services—to a health 

commission, which will coordinate, monitor, submit reports on the 

demonstration’s activities, and make recommendations for payment 

allocations;39

• a program that educated patients on primary care and proper use of 

the emergency room;40

• the initiation of a coverage expansion pilot that would provide a limited 

primary care benefit package and test the use of a voucher system to 

provide acute hospital services when needed by individuals in the pilot 

expansion population.

and

Under the Rhode Island demonstration, HHS allowed a funding approach 

that established an overall spending—or global cap—on the federal 

matching funds for the state’s Medicaid program. This cap puts the state 

at risk for any expenditures in excess of the cap, as the state is required 

to continue providing coverage for its Medicaid population using state 

funds. HHS gave the state new flexibility to manage its program by 

allowing Rhode Island to consolidate its Medicaid program under one 

comprehensive section 1115 demonstration, incorporating populations 

and services previously covered under the state plan, a previous section 

 

38Prior to the demonstration, hospital systems in Missouri funded a system to pay for 

services provided to indigent individuals. For economic reasons, the hospitals stopped 

providing payments, and the state submitted its demonstration proposal in efforts to obtain 

federal matching funds for these payments.

39These costs—both state and federal—could not exceed $75,000 for 2 years of the 

demonstration or $300,000 for 3 years of the demonstration.

40This program worked with uninsured individuals that come to the emergency rooms and 

educated them on available resources for primary/non-emergent care, scheduled followup appointments with primary care providers, and arranged transportation to 

appointments. These services were coordinated while the individuals were in the 

emergency room. The costs—both state and federal—for this program could not exceed 

$175,000 per year for 2 years of the demonstration or $700,000 per year for 3 years.

HHS Approved a Global 

Cap for One State’s 

Demonstration 
 

Page 20 GAO-13-384 Medicaid Demonstration Waivers

1115 demonstration, and multiple other Medicaid waivers.41 According to 

HHS, this consolidation would allow Rhode Island to seamlessly provide 

services to individuals who previously had to qualify to receive services, 

such as home and community-based services through different programs 

that were governed by different rules and authorities. The state’s proposal 

indicated that this flexibility would allow the state to better manage the 

use of long-term care and increase home and community-based services. 

Through the demonstration, the state also was given the flexibility to

make certain programmatic changes to its Medicaid program without 

having to follow more formal procedures. For example, for certain 

changes, such as those that would otherwise need to be processed as an 

amendment to the Medicaid state plan or to the demonstration terms and 

conditions or that did not affect eligibility or benefits, the state was 

allowed to only notify HHS of the change.42 HHS officials noted that this 

was the first time they approved a test of this type of administrative 

flexibility.

Idaho, Michigan, and New Mexico were required by federal law to 

discontinue using CHIP funds to cover childless adults, but were allowed 

to continue services for this population with Medicaid funds under a new 

section 1115 demonstration. These three states each applied and 

received approval for new demonstrations to continue to provide 

coverage to childless adults, without expanding to any new populations. 

Under these demonstrations, various types of benefits were provided to 

the childless adult populations. For example, Idaho was approved to 

provide premium assistance for qualifying employer-sponsored insurance, 

while Michigan and New Mexico were approved to provide coverage for 

services. Michigan was approved to limit benefits to outpatient services, 

and New Mexico was approved to provide coverage for both inpatient and 

outpatient services.

 

41Some of these populations were covered under a previous section 1915(c) waiver. 

Under a section 1915(c) waiver, states may provide coverage of services for a targeted 

population that may not otherwise be available under the state’s Medicaid plan. 

Specifically, states may provide home or community-based health care to beneficiaries 

who would, if not for the services provided under the waiver, require institutional care.

42Under the demonstration, the state was required to categorize the types of changes it 

may make to the demonstration, and for certain categories the state was authorized to 

notify HHS of the change rather than submit an amendment to the Medicaid state plan or 

the demonstration.

HHS’s Approvals Allowed 

Three States to Use 

Medicaid Funds to 

Continue Coverage to 

Expansion Populations
 

Page 21 GAO-13-384 Medicaid Demonstration Waivers

All 10 states we reviewed were approved to implement new ways of 

expanding coverage or imposing cost sharing requirements on different 

Medicaid populations. Examples of these strategies are presented below.

• Arizona’s demonstration allowed, for a limited time, the state to 

charge expansion enrollees a fee when they miss a physician 

appointment in order to encourage proper use of medical services.43

The demonstration also allowed the state to impose cost sharing for 

non-emergency use of the emergency room, as well as higher cost 

sharing for brand name drugs when a generic is available.44

• Indiana’s demonstration allowed the state to establish a highdeductible health plan and health care spending account for 

uninsured adults enrolled for coverage under the demonstration. 

Expansion enrollees must make specified contributions to their 

accounts, based on income levels, as a condition of continued 

enrollment. The accounts must be used by enrollees to pay for the 

cost of health care services until a deductible is reached; however, 

preventive services up to a maximum amount would be exempt from 

this requirement. The spending account was intended to provide 

incentives for participants to utilize services in a cost-efficient manner. 

This demonstration also allowed the state to impose an enrollment 

cap on the number of childless adult expansion enrollees for its health 

savings account program.

• Three states—Idaho, Michigan, and New Mexico—were approved to 

continue some coverage strategies from their previous 

 

43This fee was not applicable to those residing in two counties, and the application of the 

fee was at the provider’s discretion.

44HHS’s approval of this cost sharing, however, has been subject to legal challenges. On 

February 7, 2013, a court held that HHS’s approval of this cost sharing for individuals only 

eligible under the demonstration was invalid. Specifically, the court determined that 

because HHS failed to consider expert opinions on the negative effects of cost sharing, 

the agency’s decision to approve the cost sharing was arbitrary and capricious, in violation 

of the Administrative Procedure Act. The court required HHS to reevaluate this approval 

and develop a plan to address the deficiencies by May 2013. See Wood, et al. v. Betlach, 

et al., 2013 WL 474369 (D. Ariz. 2013). On April 8, 2013, the Secretary issued a new 

approval letter for Arizona, reaffirming the prior approval of increased cost sharing for 

certain segments of the demonstration population. In this letter HHS stated that, in light of 

the court’s decision, HHS had reconsidered the state’s request and had reanalyzed the 

administrative record, including objections raised by interested parties.

States Were Approved to 

Implement Different 

Coverage Strategies and 

New Cost Sharing on 

Certain Populations 

through the 

Demonstrations 
 

Page 22 GAO-13-384 Medicaid Demonstration Waivers

demonstrations.45

• Rhode Island was allowed to form and pay for entities dedicated to 

reviewing the needs of enrollees eligible for long-term care. According 

to the state’s proposal, this process facilitated the appropriate care 

setting by shifting care away from high-cost institutional settings when 

less costly home and community-based care was appropriate. The 

organization did this by helping enrollees decide how to manage their 

health care needs based on a distinction given to them as “highest 

need,” “high need,” or “preventive.” This designation allowed the state 

to determine which cost-effective, long-term services an enrollee 

could receive. For example, those designated as highest need were 

approved to receive nursing home care, while those designated as 

preventive were approved to receive certain home health services.

For example, Idaho’s premium assistance 

demonstration required a 50 percent employer contribution toward the 

cost of the health benefit plan. Michigan’s demonstration allowed the 

state to continue to provide a limited benefit package that focused on 

outpatient services and required prior authorization for some of these 

services. Finally, New Mexico’s demonstration allowed the state to 

cap medical expenditures for each enrollee.

For 4 of 10 demonstrations we reviewed, HHS approved spending limits 

that were based on assumptions of cost growth that were higher than 

those reflected by the state’s historical spending and the President’s 

budget. In addition, in some cases the approved spending limits included 

costs in the base year that were hypothetical. If HHS had held spending 

limits in the four demonstrations to levels suggested by its policy, we 

estimate that the spending limits would have been $32 billion lower over 

the 5-year term of the demonstrations. We also found that HHS’s budget 

neutrality policy is out-dated, because it does not reflect HHS’s current 

processes or provide assurances that data used for spending limits are 

reliable.

 

45These states were required by federal law to discontinue using CHIP funds to cover 

childless adults, but were allowed to continue services for this population with Medicaid 

funds under a new section 1115 demonstration.

For 4 of 10 Reviewed 

Demonstrations, 

HHS’s Policy and 

Process for Approving 

Spending Limits Did 

Not Provide 

Assurances That 

Demonstrations Will 

Not Increase Federal 

Costs 
 

Page 23 GAO-13-384 Medicaid Demonstration Waivers

HHS approved spending limits for the Arizona, Indiana, and Rhode Island 

demonstrations that used growth rates that exceeded benchmark rates 

and, in the case of Texas, included hypothetical costs in the base year 

spending. HHS officials reported that their policy and process allow for 

negotiations in determining spending limits, including adjustments to the 

benchmark policy. However, HHS’s policy does not specify criteria and 

methods for such adjustments or the documentation and support needed 

for adjustments. We found that the criteria and methods for making the 

adjustments in these states were not always clear or well supported. Our 

estimates show that, had HHS used benchmark growth rates and actual 

base year costs, the 5-year spending limits would have been almost 

$32 billion dollars lower than what was actually approved. The federal 

share of the $32 billion reduction would constitute an estimated 

$21 billion. (See table 1.)

Table 1: Comparison of 5-Year Medicaid Spending Limits Approved by the 

Department of Health and Human Services (HHS) and Estimated Spending Limits 

Using Benchmark Growth Rates and Actual Costs

Dollars in millions

State 

HHSapproved 

spending limit

Estimate of 

spending limit using 

benchmark growth 

rates and actual 

base year costs

Increase in 

spending in 

HHS approved 

spending limit

Estimated 

federal share of 

increase in 

spending limit

Arizona

a

$72,679 b $46,382 $26,297 17,698

Indiana 10,626 10,211 416 278

Rhode Island 12,075 11,303 772 402

Texas 142,394 137,827 4,567 2,659

Total $237,774 $205,723 $32,051 $21,037

Source: GAO analysis of HHS data.

Notes: These demonstrations were approved between January 2007 and May 2012. Spending limits 

approved by HHS and our estimates of spending limits under HHS’s policy reflect limits on total 

federal and state spending. We calculated spending limits under HHS’s policy using the most recent 

year of expenditures provided by the state for the base year and benchmark growth rates, that is, the 

lower of either the state’s historical average cost growth rate or the estimate of Medicaid cost growth 

nationwide provided by the Centers for Medicare & Medicaid Services’ (CMS) actuary. We also 

excluded hypothetical costs. Column totals may not add due to rounding.

a

The estimated federal share is based on the 2012 Federal Medical Assistance Percentage (FMAP) 

for each of the four states. The federal government matches state Medicaid expenditures for most 

services according to the state’s FMAP. A state’s FMAP is calculated using a statutory formula based 

on the state’s per capita income in relation to the national per capita income.

b

HHS Approved Spending 

Limits for Four States 

Based on Growth 

Projections That Exceeded

Benchmarks and Included 

Hypothetical Costs, with 

Limited Support

Amounts represent the spending limit for four of the six beneficiary groups included in the 

demonstration. For the remaining two groups, HHS’s documentation did not include historical 

enrollment because they were new populations covered under the demonstration and no enrollment 

data existed. As a result, we could not calculate a spending limit for them. This figure also does not 
 

Page 24 GAO-13-384 Medicaid Demonstration Waivers

reflect other components of the demonstration’s total spending limit, including a maximum of about 

$1.8 billion for supplemental payments to finance uncompensated care and other activities. 

HHS departed from its policy in selecting base year expenditures and 

benchmark growth rates for the approved Arizona spending limit without a 

clear rationale. Had actual base year expenditures and benchmark 

growth rates been used, the 5-year spending limit would have totaled 

about $26 billion less. HHS established the largest portion of the Arizona 

spending limit, per person spending, using an outdated baseline of 

projections of the costs of operating the program without the 

demonstration.46 The projections were based on the estimated costs of 

operating the program developed for the state’s previous demonstration—

initially approved in 1982—and adjusted forward to 2011. HHS’s policy 

indicates that the spending limits for new demonstrations should be 

based on actual expenditures in the base year. Arizona’s actual 

expenditures in 2011—the base year for the demonstration had HHS 

approved a spending limit based on its policy—were much lower than the 

projected costs used by HHS as the basis of the spending limit. HHS 

officials said that the agency was not able to estimate the cost of the 

Arizona Medicaid program without the demonstration using recent actual 

expenditure data, because the state’s Medicaid program had operated 

under a demonstration since 1982. We found that HHS’s rationale for 

relying on 30-year-old projections of what the Medicaid program would 

have cost without the demonstration was unsupported. Actual 

expenditure data were available and would more accurately reflect state 

spending under Medicaid than the old projections that were based on the 

state operating without a Medicaid program. We estimate that HHS’s use 

of projected costs rather than actual expenditures for the base year 

increased the spending limit by about $22 billion.

 

46The limit on per person spending included specific limits for six populations included in 

the demonstration: those eligible on the basis of receiving Supplemental Security Income, 

persons with developmental disabilities, elderly and physically disabled persons, children 

and families, childless adults, and participants in the family planning program. In addition 

to the per person limit on spending, Arizona’s spending limit also included $1.7 billion for 

the state to finance uncompensated care, about $77 million to expand coverage to 

children up to age 19 with family income up to 175 percent of the FPL not otherwise 

eligible for Medicaid, and unspecified amounts for other activities such as payments to 

Indian Health Service facilities. 

Arizona
 

Page 25 GAO-13-384 Medicaid Demonstration Waivers

HHS’s approved spending limit for Arizona also used growth rates for 

certain populations that were higher than the benchmark growth rates 

suggested by agency policy.47

Table 2: Comparison of Growth Rates Approved by the Department of Health and 

Human Services (HHS) for the Arizona Medicaid Demonstration and Benchmark 

Growth Rates 

The rates HHS used reflected national 

growth rates, which were higher than the state historical growth rates 

based on actual state historical expenditures. (See table 2.) Instead, HHS 

compared national growth rates to the projected state growth approved as 

part of the state’s previous demonstration, developed 30 years earlier. 

Officials also told us that they did not consider comparing the national 

growth rates to the state’s historical growth rates derived from actual state 

expenditures because it was unclear if these expenditures would have 

occurred absent the demonstration. However, without the demonstration, 

Arizona would not have a Medicaid program. In addition, the previously 

approved rate does not appear to be a valid substitute given the large 

difference between that rate and the growth rates indicated by actual 

historical expenditure data. We estimate that HHS’s use of the previously 

projected growth rates rather than actual state expenditures to derive the 

benchmark growth rate increased the approved 5-year spending limit by 

about $4.2 billion.

Percent 

Medicaid beneficiary category

HHS-approved 

growth rate

Benchmark 

growth rate a

Persons receiving Supplemental Security Income 6.0% 4.4%

Persons with developmental disabilities 6.0 0.3

Elderly and physically disabled persons 5.2 2.6

Children and families 5.2 2.5

Source: GAO analysis of HHS data.

a

Annual growth rates approved by HHS in October 2011 for the 5-year term of the demonstration 

(October 2011–September 2016).

 

47The exceptions were the per person spending limits for childless adults and for the 

family planning extension program. For childless adults, HHS approved a per person 

spending limit equal to the state’s projection of per person costs in the first year of the 

demonstration and did not allow per person costs to grow for the population. For the family 

planning demonstration, HHS used the national growth rate, which was lower than the 

state historical growth rate.
 

Page 26 GAO-13-384 Medicaid Demonstration Waivers

For the Indiana demonstration, HHS approved a spending limit that was 

based on a projected growth rate that exceeded the benchmark growth 

rate without clear support for doing so. Had HHS used the benchmark 

growth rate, the demonstration’s 5-year spending limit would have been 

an estimated $416 million lower. While HHS developed growth rates 

based on only 3 of the 5 years of historical data, HHS documented that 

the most recent 2 years of data reflected large decreases in spending 

from the state’s increased use of managed care and that these changes 

in spending were a onetime effect that likely would not continue. We 

determined that HHS had adequately explained and documented its 

reason for making this adjustment. However, we found that HHS did not 

have adequate support for approving a 4.4 percent growth rate for all four 

populations included in the demonstration, when the historical data 

provided by the state showed benchmark growth rates that were lower 

than 4.4 percent for three of those populations.48 (See table 3.) HHS 

officials stated that a policy decision was made to use the average state 

historical growth rates because it was believed that it was more likely to 

reflect cost trends in the future. Officials added that one of the individual 

populations had a zero growth rate historically and it was decided that as 

a result of regular health care inflation, costs would grow. Approving an 

average growth rate does not appear to be a valid substitute for the state 

historical growth rates for each population given the significant difference 

for the adult caretaker populations, and the fact that health care inflation 

was present during prior years and would have also affected populationspecific growth rates. Had HHS used benchmark growth rates for each 

population, the spending limit would have been about $416 million lower 

than the approved spending limit.

 

48The four populations include children, pregnant women, children’s caretakers who have 

historically been eligible for Medicaid, and children’s caretakers newly eligible for Medicaid 

under the demonstration.

Indiana
 

Page 27 GAO-13-384 Medicaid Demonstration Waivers

Table 3: Comparison of Growth Rates Approved by the Department of Health and 

Human Services (HHS) for the Indiana Medicaid Demonstration and Benchmark 

Growth Rates

Percent 

Medicaid beneficiary category

HHS-approved 

growth rate

Benchmark 

growth rate a

Children 4.4% 4.9%

Pregnant women 4.4 4.1

Historically eligible adult caretakers 4.4 0.0

Newly eligible adult caretakers 4.4 0.0

Source: GAO analysis of HHS data.

a

HHS approved an aggregate spending limit of about $12.1 billion for the 

Rhode Island demonstration based on a growth rate that exceeded the 

benchmark growth rate without clearly supporting the use of a higher 

growth rate. Had HHS used the benchmark growth rate, we estimate that 

the spending limit would have been about $772 million lower than the 

approved limit. According to HHS officials, the spending limit was 

developed using the 2006 base year average national growth rate of 

7.8 percent; however, the state’s historical growth rate in the 5 years prior 

to applying for the demonstration was 7.0 percent. HHS officials told us 

that though the state provided data for 2007 to be used as the base year, 

HHS instead chose 2006 as the base year, because negative trends in 

the 2007 data were not representative, did not appear reliable, and 

contained what they called outliers. So while HHS based the Rhode 

Island spending limit on the lower of the two growth rates for 2006, the 

agency could not provide clear support for using that base year. (See 

table 4.)

Annual growth rates approved by HHS in December 2007 for the 5-year term of the demonstration. 

(January 2008–December 2012).

Table 4: National and State-Historical Growth Rates that the Department of Health 

and Human Services (HHS) Compared in Selecting a Base Year and Approving the 

Rhode Island Medicaid Demonstration

Growth rates using 2006 as base year Growth rates using 2007 as base year

HHS-approved 

growth rate

State historical 

growth rate a National growth rate

State-historical 

growth rate

7.8% 7.9% 8.0% 7.0%

Source: GAO analysis of HHS data.

a

Rhode Island

The HHS-approved growth rate in Rhode Island was the national growth rate (January 2009–

December 2013).
 

Page 28 GAO-13-384 Medicaid Demonstration Waivers

In Texas, the HHS-approved spending limit included two types of 

hypothetical costs in the state’s base year expenditures. These costs 

represented higher payment amounts the state could have paid to 

providers, but did not actually pay. We estimated that, had the state only 

included actual expenditures as indicated by HHS’s policy, the spending 

limit would have totaled about $4.6 billion less. HHS’s decision sets a 

precedent that a state can increase a demonstration spending limit on the 

basis that it could have hypothetically paid Medicaid providers more than 

it actually chose to pay them, without a clear basis for doing so.

First, Texas’s spending limit was based, in part, on hypothetical costs as 

opposed to actual incurred expenditures with respect to UPL payments 

that could be made for inpatient hospital services but were not actually 

made. Prior to applying for this demonstration, about 1.3 million of the 

state’s Medicaid population received inpatient hospital services under 

managed care, and the state did not make UPL payments for these 

services.49

Second, Texas proposed including additional hypothetical costs in the 

base year expenditures by using the maximum amount of UPL payments 

In its spending limit estimate, however, Texas included costs 

for UPL payments and fee-for-service payments for beneficiaries 

previously receiving inpatient hospital services under a managed care 

delivery model. In its proposal, the state said it would take certain actions 

in response to directives from its state legislature. Specifically, the state 

said that if the demonstration was not approved by HHS it would carve 

out inpatient hospital services previously provided under managed care 

and pay for these services on a fee-for-service basis and also make UPL 

payments for these services. These actions would increase costs 

because fee-for-service payments and UPL payments to hospitals would 

greatly exceed capitation payments made to managed care plans. HHS 

officials stated that, given a directive of the Texas legislature, they 

believed the state would do so, and they allowed the estimated increased 

costs of such an arrangement to be factored into the spending limit even 

though Texas had not changed its payment model. As a result, 

$3.8 billion of the demonstration spending limit was based on what Texas 

estimated it could pay providers in the future but had not been paying 

prior to the demonstration.

 

49As referenced above, states are generally prohibited from making supplemental 

payments for services delivered under a managed care payment and delivery model. 

Texas 
 

Page 29 GAO-13-384 Medicaid Demonstration Waivers

the state could have paid rather than the actual amount of payments the 

state did make. In its proposal, the state documented that during each of 

the 4 years leading up to and including the base year, the state’s actual 

hospital inpatient UPL payments were less than the maximum amount the 

state could have paid.50 HHS officials noted that because the actual 

payments were accounting for an increasing percentage of the maximum 

UPL payments the state could have made, they allowed the state to use 

this larger amount. As a result of HHS’s decision, about $796 million of 

the demonstration spending limit was based on a hypothetical 

expenditure that did not represent actual expenditures of the state under 

its program.51

HHS approved spending limits for three demonstrations that redirected 

federal DSH funds, which were consistent with its policy. For the District 

of Columbia, Missouri, and Wisconsin demonstrations, HHS limited 

federal spending to the lower of the states’ DSH allotment or actual DSH 

expenditures in the year prior to the demonstrations.52 This approach 

helps provide assurances that the federal government will spend no more 

under the demonstrations than what it would have spent without them. 

For the District of Columbia and Missouri, HHS limited federal spending to 

a specific dollar amount, which represented a portion of the states’ DSH 

expenditures in the year prior to the demonstrations’ approvals.53

 

50As referenced above, the federal share of UPL payments are limited to a reasonable 

estimate of what Medicare would pay for a similar service.

The 

51Although reviewing the accuracy of the state’s calculation of the maximum UPL was not 

within the scope of our review, we have previously reported concerns with the different 

methods and data used by states to estimate the amount of UPL payments allowed. See 

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

GAO-04-228 (Washington, D.C: Feb. 13, 2004). Further, UPL supplemental payment 

calculations are not subject to annual independent audits that verify that states have 

accurately calculated the maximum allowable UPL payments using reliable data, which is 

required for DSH payments. See GAO, Medicaid: More Transparency of and 

Accountability for Supplemental Payments Are Needed, GAO-13-48 (Washington, D.C.: 

Nov. 26, 2013). HHS officials said they did not review the state UPL calculation in 

reviewing and approving the state spending limits, and used the maximum payment 

amounts submitted by the state.

52Use of DSH allotments to set demonstration spending limits does not require the use of 

growth rates to project future costs. 

53The remaining funds under the District of Columbia’s and Missouri’s allotments are 

available for the states to make DSH payments to hospitals.

HHS Approved Spending 

Limits for Three 

Demonstrations Based on 

Actual DSH Expenditures 

and Followed Statutory 

Criteria in Approving 

Spending Limits for Three 

Other Demonstrations
 

Page 30 GAO-13-384 Medicaid Demonstration Waivers

Wisconsin spending limit was set at the total DSH allotment, which also 

represented the amount of expenditures in the year prior to the 

demonstration’s approval. The approved spending limit for the entire 

length of the demonstration was about $145 million for the District of 

Columbia, $105 million for Missouri, and $797 million for Wisconsin.

The Idaho, Michigan, and New Mexico demonstrations were a unique 

type of section 1115 demonstration governed by requirements not 

applicable to other types of Medicaid section 1115 demonstrations. For 

these three states, HHS set spending limits using a process provided for 

under CHIPRA. These states applied and received approval for new 

section 1115 demonstrations, through which they continued to cover 

childless adults using Medicaid funds instead of CHIP funds. CHIPRA 

also defined the budget neutrality process for such demonstrations by 

identifying the base year and growth rates for demonstration spending 

limits.54 For each of the three demonstrations, HHS followed the budget 

neutrality procedures outlined in CHIPRA in setting the spending limit on 

an annual basis. The initial annual spending limits were based on 

expenditure projections of about $80,000 for Idaho, about $137 million for 

Michigan, and about $177 million for New Mexico. For the first 

demonstration year, spending limits were slightly less because the 

demonstrations operated less than a full year.

HHS’s policy for setting spending limits for proposed demonstrations is 

inconsistent with its actual practices. To this extent, HHS’s internal 

controls are insufficient. According to Standards for Internal Control in the 

Federal Government, government processes, including management 

directives and administrative policies, should be clearly documented.55

 

54CHIPRA required that HHS limit spending for fiscal year 2010 to the amount spent by 

the state for that population in fiscal year 2009 increased by the percentage increase (if 

any) between 2009 and 2010 in the projected nominal per capita amount of the National 

Health Expenditures. The act further required HHS to increase annual spending limits for 

the remaining years based on the percentage increase, if any, in the projected nominal 

per capita amount of the National Health Expenditures as published for each calendar 

year.

In 

discussing documentation for HHS’s policy, published in 2001, officials 

indicated that it reflected HHS’s most current processes and policy on 

55GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1

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

HHS’s Policy Does Not 

Reflect Current Processes 

or Provide Assurances 

That Data Used for 

Developing Spending 

Limits Are Reliable
 

Page 31 GAO-13-384 Medicaid Demonstration Waivers

budget neutrality, but acknowledged that some aspects of the policy, as 

written, were no longer applicable to current processes. For example, 

HHS officials told us that the methods described for determining spending 

limits of demonstration extensions were no longer applied. In addition, 

while the policy requires that states submit 5 years of historical data in 

developing spending limits—and HHS officials told us that this is their 

preference—the agency’s current processes allow states to use data 

based on the state’s estimate of spending or enrollment. For example, if 

the 2 most recent years of expenditure data are not available because of 

delays in Medicaid claims processing, estimates for these years can be 

used. Officials indicated that if estimates are used instead of actual data, 

the state must explain any adjustments. But HHS officials did not have 

documentation for the current process or policy on when estimates are 

allowed, or the type of documentation of adjustments that is required. In 

addition, the HHS’s policy does not require documentation or describe 

how the data used to set spending limits are reviewed to ensure reliability 

and accuracy. According to officials, the data used for projecting spending 

comes from each state’s Medicaid data system, and HHS generally does 

not test the accuracy of the data. However, officials noted that the state 

systems may have their own quality and reliability checks.

In October 2012, HHS introduced an optional waiver application template 

that included a standard budget neutrality form that states could use to 

submit 1115 demonstration applications.

56

 

56This template was not in effect for the demonstrations we reviewed. 

The template provides a 

standard format for states to submit commonly used data elements—such 

as historical expenditure and enrollment data, and the projected growth 

rates and per capita costs based on the state historical enrollment and 

costs—and a description of the sources and methods for obtaining state 

historical data. The budget neutrality form allows states to submit actual 

or estimated data. HHS officials told us that the new template does not 

establish any new budget neutrality policy, but instead was intended to 

make the application template more user-friendly than the prior template 

that was developed in conjunction with the agency’s policy published in 

2001. The new budget neutrality form reiterates HHS’s 2001 policy that 

states that spending limits should be based on the lower of the statespecific historical growth rate or estimated nationwide growth rate. The 

form does not provide additional guidance, for example, on the process 

and criteria for when estimated state historical data rather than actual 
 

Page 32 GAO-13-384 Medicaid Demonstration Waivers

state historical expenditure data are used in setting spending limits, or 

when deviations from the benchmark policy are allowed and how they 

should be documented and supported. 

The fiscal challenges facing the federal government require prudent 

stewardship of federal Medicaid resources. While section 1115 Medicaid 

demonstrations serve as an important mechanism for states to implement 

projects that allow for innovation while promoting Medicaid objectives, 

HHS policy requires that they not expose the federal government to 

additional financial liability. The Secretary of Health and Human Services 

has an important responsibility for ensuring that comprehensive 

demonstrations will not increase federal costs above what would be 

incurred without these demonstrations. HHS’s long-standing budget 

neutrality policy for these demonstrations, on its face, recognizes that 

states should not be given access to additional federal funding at the 

same time they are provided with greater program flexibility. However, 

neither the policy, nor HHS’s implementation of it, ensures the prudent 

stewardship of federal Medicaid spending.

After examining HHS’s approach for approving spending limits of recently 

approved demonstrations, we have three main concerns regarding the 

budget neutrality policy and process. First, HHS’s policy is not reflected in 

its actual practices and, contrary to sound management practices, is not 

adequately documented. Second, the policy and processes lack 

transparency regarding criteria and the supporting evidence required to 

justify deviations from historical spending and established benchmark 

growth rates. We recognize that forecasting spending during changing 

economic times is challenging and a state’s circumstances may warrant 

such deviations. Nonetheless, we believe that approved spending limits 

that are based on baselines and growth rate expectations that greatly 

deviate from HHS’s current benchmarks should be well-supported and 

documented. HHS’s policy is currently silent as to when deviations are 

allowed and does not require that reliable evidence be provided to justify 

deviations. Transparency around the basis for spending limit decisions is 

important not only for assurances of the ongoing fiscal integrity and 

sustainability of the program, but also for assurances of consistency of 

approvals among states. Third, the policy as implemented allows 

methods for establishing spending limits that we believe are inappropriate 

for such purposes, such as allowing states to include hypothetical costs in 

the baseline for spending limits. The second and third concerns parallel 

those we have raised in earlier reports. In 2008, because HHS disagreed 

that changes to the budget neutrality policy and review process were 

Conclusions 
 

Page 33 GAO-13-384 Medicaid Demonstration Waivers

needed, we suggested that Congress consider requiring increased 

attention to fiscal responsibility in the approval of section 1115 Medicaid 

demonstrations and require the Secretary of Health and Human Services 

to improve the demonstration review process by, for example, clarifying 

the criteria for approving spending limits and documenting and making 

public the basis for such approvals. Thus far Congress has not acted on 

this suggestion. On the basis of the findings in this report, we believe the 

Secretary needs to take additional actions to ensure that HHS’s budget 

neutrality policy reflects current practices and that the spending limits for 

the Texas and Arizona demonstrations are appropriate, well supported, 

and based on clear criteria.

To improve the transparency of the process for reviewing and approving 

spending limits for comprehensive section 1115 demonstrations, we 

recommend that the Secretary of Health and Human Services take the 

following two actions:

1. update the agency’s written budget neutrality policy to reflect actual 

criteria and processes used to develop and approve demonstration 

spending limits, and ensure the policy is readily available to state 

Medicaid directors and others; and

2. reconsider adjustments and costs used in setting the spending limits 

for the Arizona and Texas demonstrations, and make appropriate 

adjustments to spending limits for the remaining years of each 

demonstration.

We provided a draft of this report to HHS for comment. In its written 

comments, HHS acknowledged that it has not always communicated its 

budget neutrality policy broadly or clearly, but stated it has applied its 

policy consistently. The Department suggested that recent steps to 

increase transparency—such as publishing a new section 1115 

application template and implementing a federal public input process—

reflect updated policy on how HHS sets spending limits and ensures 

demonstrations are budget neutral. While the application template may 

contain guidance on some of the data elements commonly used to 

demonstrate budget neutrality, we do not believe that it addresses how 

HHS reviews the applications or the criteria used for setting spending 

limits. We have revised our report to clarify how this template falls short of 

clarifying HHS’s budget neutrality policy. HHS did not otherwise identify 

Recommendations for 

Executive Action

Agency Comments 

and Our Evaluation
 

Page 34 GAO-13-384 Medicaid Demonstration Waivers

any written policy it has issued since 2001 either during the course of our 

review or in its comments.

HHS did not concur with our recommendation that its budget neutrality 

policy should be updated to reflect the actual criteria and processes used 

to develop and approve demonstration spending limits, and ensure that 

the policy is readily available. HHS stated that our findings that four 

states’ spending limits would have been lower had the agency followed its 

policy were flawed. HHS said that we used only a subset of the best 

available data that the Department used to assess budget neutrality and 

that we relied on an outdated policy issued in 2001. We disagree with 

these assertions. It is important to note that, to do our analysis, we relied 

on extensive documentation and information that HHS officials specifically 

provided us as the basis for the selected states’ budget neutrality 

determinations. For example, we obtained the spreadsheets with the data 

and calculations that HHS used to determine each state’s demonstration 

spending limits. We reconciled these spreadsheets with the spending 

limits and documentation in each state’s demonstration approval and had 

numerous discussions with HHS officials to confirm our understanding of 

the data and the basis for the final spending limits. At no time did officials 

tell us that they had provided us only with a subset of the data used to 

assess budget neutrality or cite additional information or data that we had 

not considered. HHS’s assertion that we relied on an outdated budget 

neutrality policy that did not reflect the Department’s current policy also 

conflicts with information provided to us during the course of this review. 

On multiple occasions, we discussed with officials the policy used to 

establish demonstration spending limits, including the applicability of the 

2001 written policy. HHS officials told us—both verbally and in writing—

that the 2001 written policy generally reflected the Department’s current 

policy toward budget neutrality. They told us that this document was the 

most recent document capturing the budget neutrality policy. However, as 

we described in the draft report, HHS officials told us that some parts of 

the 2001 written policy were outdated. The Department did not have any 

plans to update the 2001 policy.

HHS did not concur with our recommendation that it should make 

adjustments to the spending limits for the remaining years of the Arizona 

and Texas demonstrations. In its comments, HHS said that the 

adjustments and costs it used were justified. However, HHS did not 

provide any new information or support beyond what was considered and 

discussed in the draft report. For example, HHS did not respond to our 

concerns that Texas’ spending limit included $3.8 billion in costs that the 

state could hypothetically pay providers in the future but did not actually 
 

Page 35 GAO-13-384 Medicaid Demonstration Waivers

pay them prior to the demonstration. We continue to believe HHS’ 

decisions were not clear or well supported. HHS also stated that it had 

significantly strengthened the accountability in Texas by requiring HHS 

approval before federal matching funds can be drawn down for state 

expenditures made under the demonstration, and by instituting robust 

reporting requirements. We believe that improved oversight of actual 

spending occurring under the demonstrations does not lessen the need 

for establishing sound spending limits. 

HHS’s comments are reproduced in appendix III. HHS also provided 

technical comments, which we incorporated as appropriate.

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

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

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

Secretary of Health and Human Services. In addition, the report is 

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

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

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

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

page of this report. Major contributors to this report are listed in 

appendix IV. 

Sincerely yours,

Katherine M. Iritani

Director, Health Care
Appendix I: Summary of Submitted and 

Reviewed Applications for Comprehensive 

Section 1115 Medicaid Demonstrations

Page 36 GAO-13-384 Medicaid Demonstration Waivers

From January 2007 through May 2012, the Department of Health and 

Human Services (HHS) received 62 comprehensive section 1115 

Medicaid demonstration applications from 38 states, 3 of which were 

subsequently withdrawn by the states. HHS approved 45 of the remaining 

applications, disapproved 1, and another 13 were still pending completion 

of review as of May 31, 2012.1 About two-thirds, or 31, of the 45 approved 

applications were for extensions of existing demonstrations, while 8 of the 

13 still under review were for new demonstrations. For the 46 reviews that 

HHS completed, reviews took from 47 days to almost 4 years, and 

averaged 323 days from the date of application to the date of the review 

decision.2 About 72 percent of the reviews took a year or less to 

complete. (See table 5.)

 

1

We excluded from our review demonstrations that were not comprehensive, that is, they 

were limited to one category of services. We also excluded demonstrations that extended 

coverage to new populations in response to Medicaid expansion, as provided for under 

the Patient Protection and Affordable Care Act (PPACA).

2

The review times we report are based on the number of calendar days between the date 

when HHS received an official application and the date HHS made its final decision on 

whether to approve or not approve the application. Review times do not include any 

preliminary discussions and reviews of concept papers.

Appendix I: Summary of Submitted and 

Reviewed Applications for Comprehensive 

Section 1115 Medicaid Demonstrations 
Appendix I: Summary of Submitted and 

Reviewed Applications for Comprehensive 

Section 1115 Medicaid Demonstrations

Page 37 GAO-13-384 Medicaid Demonstration Waivers

Table 5: Status of Comprehensive Section 1115 Medicaid Demonstration Applications, by State, Submitted to the Department 

of Health and Human Services (HHS) from January 2007 through May 2012

State Demonstration name Application date Decision date

Days between 

application

and decision

AR Arkansas Safety Net Benefit Program 9/29/10 12/29/11 456

AR Arkansas ARKidsB 12/18/07 12/23/10 1,101

AR Arkansas TEFRA-like 6/01/10 12/14/10 196

AZ Arizona Health Care Cost Containment System 3/31/11 a 10/21/11 204

CA California Bridge to Reform 6/03/10 11/02/10 152

CO Colorado Adults without Dependent Children 12/02/11 3/30/12 119

CO Colorado Adult Prenatal Coverage and Premium Assistance in CHP+ 5/27/09 Pending Pending

DC District of Columbia Childless Adults 7/23/10 a 10/28/10 97

DE Delaware Diamond State Health Plan 7/01/09 1/31/11 579

FL Florida Medicaid Reform 6/30/10 12/15/11 533

FL Florida MEDS-AD 12/30/09 12/14/10 349

HI Hawaii QUEST Expanded 2/17/07 2/07/08 355

IA Iowa Care 10/09/09 09/01/10 327

ID Idaho Children’s Access Card 8/04/09 9/30/10 422

ID Idaho Non-pregnant Childless Adults 

(Idaho Adult Access Card Demonstration)

9/09/09 a 12/23/09 105

IL Illinois New Demo Program 1/30/12 Pending Pending

IN Healthy Indiana Plan 7/03/07 a 12/14/07 164

IN Healthy Indiana Plan 12/28/11 Pending Pending

KS Kansas Kan Care Withdrawn b Withdrawn Withdrawn

KY Kentucky Health Care Partnership 10/29/10 11/17/11 384

LA Louisiana Greater New Orleans Community Health Connection 8/06/10 9/22/10 47

MA MassHealth 6/30/10 12/20/11 538

MD Maryland Health Choice 7/01/10 6/27/11 361

ME Maine Childless Adults 9/30/09 9/27/10 362

MI Michigan Medicaid Nonpregnant Childless Adults Waiver 

(Adults Benefit Waiver)

9/29/09 a 12/22/09 84

MN Minnesota Long Term Care Realignment 2/13/12 Pending Pending

MN Minnesota Prepaid Medical Assistance Project Plus 6/29/10 6/30/11 366

MO Missouri Gateway to Better Health 2/16/10 a 7/28/10 162

MS Healthier Mississippi 9/29/08 10/28/10 759

MT Montana Basic Medicaid for Able Bodied Adults 1/25/08 11/24/10 1,034

MT Montana Medicaid Pharmacy Part D 1/28/11 6/17/11 140

NJ New Jersey Comprehensive Waiver 9/9/11 Pending Pending
Appendix I: Summary of Submitted and 

Reviewed Applications for Comprehensive 

Section 1115 Medicaid Demonstrations

Page 38 GAO-13-384 Medicaid Demonstration Waivers

State Demonstration name Application date Decision date

Days between 

application

and decision

NJ New Jersey Childless Adults 2/24/11 4/14/11 49

NJ New Jersey Family Coverage Under SCHIP 9/30/08 8/13/12 1,413

NM New Mexico State Coverage Insurance–Title XIX Component 9/28/09 a 12/30/09 93

NM New Mexico State Coverage Insurance–Title XXI Component 9/24/10 2/18/11 147

NM New Mexico State Coverage Insurance–Title XXI Component 5/1/12 Pending Pending

NM New Mexico Title XXI SCHIP 12/29/09 12/16/10 352

NM New Mexico Centennial Care-New 1115 Withdrawn b Withdrawn Withdrawn

NV Nevada Comprehensive Care Waiver 4/24/12 Pending Pending

NY New York State’s People First Waiver 11/04/11 Pending Pending

NY New York Federal-State Health Reform Partnership 9/30/10 3/31/11 182

NY New York Partnership Plan 3/31/09 7/29/11 850

OH Ohio Transformation 4/26/12 Pending Pending

OK Oklahoma SoonerCare 6/30/09 12/30/09 183

OK Oklahoma SoonerCare 12/30/11 Pending Pending

OR Oregon Health Plan 10/22/09 3/17/10 146

OR Oregon Health Plan 2/29/12 Pending Pending

RI Rhode Island Global Consumer Choice Compact 8/08/08 a 1/16/09 161

TN TennCare II 6/15/09 12/15/09 183

TX Texas Healthcare Transformation and Quality Improvement Program 7/15/11 a 12/12/11 150

TX Texas Health Care Reform Section 1115 Demonstration Withdrawn c Withdrawn Withdrawn

UT Utah Medicaid Payment and Service Delivery Reform 6/30/11 Pending Pending

UT Utah Primary Care Network 3/01/10 6/23/10 114

VA Virginia FAMIS MOMS and FAMIS Select 10/15/09 6/29/10 257

VT Vermont Global Commitment to Health 9/29/09 12/29/10 456

VT Vermont Choices for Care 6/17/10 9/21/10 96

WA Washington Transitional Bridge Demonstration 7/07/10 1/03/11 180

WI Wisconsin BadgerCare Plus for Childless Adults 7/01/08 a 12/31/08 183

WI Wisconsin BadgerCare 9/28/10 12/30/10 93

WI Wisconsin Senior Care 2/9/09 8/17/09 189

WI Wisconsin Medicaid 2014 11/10/11 Pending Pending

Source: GAO analysis of Centers for Medicare & Medicaid Services (CMS) data.

Notes: All of the demonstrations for which the review process was completed were approved with the 

exception of the Montana Medicaid Pharmacy Part D demonstration. Applications marked as pending 

had not been fully reviewed by HHS as of May 31, 2012.

a

This is 1 of the 10 new approved comprehensive demonstrations that we reviewed.

b

Application was withdrawn and subsequently resubmitted after May 31, 2012, which exceeded the 

time frame covered by this report.

c

State withdrew application after HHS raised concerns about the state’s proposal.
Appendix I: Summary of Submitted and 

Reviewed Applications for Comprehensive 

Section 1115 Medicaid Demonstrations

Page 39 GAO-13-384 Medicaid Demonstration Waivers

Officials with HHS stated that the nature of demonstration reviews is 

unpredictable because of the different factors outside HHS’s control, 

which can influence the review. Further, HHS generally does not have a 

set time frame within which applications must be reviewed.3 There are a 

number of factors that may have affected the review times for the 

demonstrations we reviewed.4

 

3

Section 1115 of the Social Security Act does impose time frames for the review of certain 

extensions. Specifically, states are required to submit applications for extensions at least 

120 days prior to the expiration date of the demonstration. HHS is required to either 

approve or disapprove these extensions within 120 days after submission of the 

applications. 42 U.S.C. § 1315(f). This process, however, only applies to extensions that 

do not seek to change the terms and conditions of the original demonstrations. HHS 

officials informed us that all of the extensions referenced in table 5 contained significant 

changes to the terms and conditions and therefore were treated as new applications, 

which do not have any applicable time frames for review.

For example, prior to applying for a new 

demonstration, states may submit a concept paper to HHS to receive 

technical assistance, advice, and other guidance. There may then be 

extended dialogue between a state and HHS about the plans included in 

a concept paper. The process can provide states with an initial indication 

of the acceptability of their proposal and thereby facilitate the application 

process. According to the officials, in cases where states have submitted 

such papers, HHS reviews may be shorter. In addition, the purpose, 

scale, and complexity of demonstration applications vary, and will result in 

the need for more or less discussion between the state and HHS. 

Similarly, the completeness of the application can affect review times. 

Applications may have lacked important details, such as data on how the 

program will be implemented, its effect on relevant beneficiary 

populations, or how budget neutrality is achieved. In these cases HHS 

may request extensive clarification, which adds to the review time 

because of the time states need to respond. Also, HHS officials said that 

state legislative activity can alter the proposal during development, or 

midcourse, which would extend HHS review times.

4

Review times may be affected in the future by recent HHS regulations. PPACA, enacted 

in 2010, required the Secretary of Health and Human Services to issue regulations for 

section 1115 applications that address certain topics including a state and federal public 

notice and comment process, submission of reports on implementation by states, and 

periodic evaluation by HHS. In response, on February 27, 2012, HHS published final 

regulations establishing these requirements, some of which may affect HHS review times. 

For example, after receipt of a completed application, HHS must provide for a 30-day 

public comment period and has to wait at least 45 days before making a final decision. 

These requirements apply to applications submitted on or after April 27, 2012, and 

therefore do not apply to the applications we are addressing in this report. 
Appendix II: A Summary of Key Features of 

Recent Demonstrations

Page 40 GAO-13-384 Medicaid Demonstration Waivers

This appendix summarizes key information on 10 new comprehensive 

section 1115 demonstrations approved from January 2007 through May 

2012. Key information presented includes: a summary of specific details 

about the purpose of the demonstration; the population covered; the term 

of each demonstration; the estimated number of people covered in the 

first and last year of the demonstration; and the approved spending limit 

over the term of each demonstration.1 Because the scope and purpose of 

demonstrations vary by state, the amount and detail of the information 

provided for each demonstration also varies.

Demonstration Term: October 2011–September 2016

Estimated Number of People Covered: first year: 1,129,869; 

last year: 1,806,984

Approved Spending Limit: Over $74.4 billion

Arizona requested to terminate its previous section 1115 demonstration, 

operating since 1982, in order to eliminate coverage for one of its adult 

populations covered previously, and to implement an enrollment freeze 

on its childless adults, effective in July 2011. The population that was to 

be eliminated was covered through the Medical Expense Deduction 

program, which was for adults with income in excess of 100 percent of 

the federal poverty level (FPL) who have qualifying health care costs that 

reduce their income to or below 40 percent of the FPL. The enrollment 

freeze applied to adults without dependent children with family income up 

to and including 100 percent of the FPL. This new demonstration 

continued to provide coverage for the Medicaid population through 

managed care. In addition, the state was approved to establish state a 

funding pool for making supplemental payments, totaling over 

$300 million per year, to providers that cover Medicaid and 

uncompensated care costs, and to make hospital payments for trauma 

and emergency services through a program that was originally a statefunded initiative. The demonstration also expanded coverage to certain 

children up to age 19 and women who lose Medicaid pregnancy 

 

1

We reported the estimated number of people covered and the approved spending limit 

when it was clearly stated in the approval documents. When it was not clearly stated, we 

estimated these figures using information from the approval documents.

Appendix II: A Summary of Key Features of 

Recent Demonstrations

Arizona Health Care 

Cost Containment 

System 
Appendix II: A Summary of Key Features of 

Recent Demonstrations

Page 41 GAO-13-384 Medicaid Demonstration Waivers

coverage.2 The state increased personal financial responsibility through 

cost sharing by implementing the use of penalties for certain enrollees 

that miss scheduled physician appointments, and encouraging 

appropriate utilization of emergency room care by imposing cost sharing 

for improper use of the emergency room.3 The state also imposed higher 

cost sharing for brand name drugs when a generic is available.4

Demonstration Term: November 2010–December 2013

Estimated Number of People Covered: first year: 4,815; 

last year: 11,121

Approved Spending Limit: $145 million

The District of Columbia was approved to redirect Disproportionate Share 

Hospital (DSH) funds in order to provide full Medicaid benefits to adults

ages 21 through 64 with incomes between 133 percent and 200 percent 

of the FPL. Benefits under the demonstration were provided through a 

mandatory managed care delivery system. Most anticipated enrollees 

were covered previously through a local program that provided more 

limited benefits.

 

2

Coverage is for children up to age 19 with family income up to 175 percent of the FPL not 

otherwise eligible for Medicaid and pregnancy coverage is extended for up to 24 months 

after birth. 

3

Nonemergency use of the emergency room can cost enrollees $30.

4

The cost for a brand-name drug is $10 compared to $4 for a generic drug.

District of Columbia 

Childless Adults
Appendix II: A Summary of Key Features of 

Recent Demonstrations

Page 42 GAO-13-384 Medicaid Demonstration Waivers

Demonstration Term: January 2010–September 2014

Estimated Number of People Covered: first year: 350; last year: 350

Approved Spending Limit:

5

Idaho was approved under a new demonstration to continue to provide 

premium subsidies to nonpregnant childless adults age 18 and above 

with incomes at or below 185 percent of the FPL.

$596,476

6 The demonstration 

allows a premium subsidy up to $100 per month per enrolled adult—a 

qualifying employee or the spouse of the employee—toward the 

individual’s share of the employer-sponsored health insurance premium. 

Participating employers are required to make a 50 percent contribution 

toward the cost of the health benefit plan.

Demonstration Term: January 2008–December 2012

Estimated Number of People Covered: first year: 669,894; 

last year: 848,919

Approved Spending Limit: $10.6 billion

Indiana received approval to operate two distinct health insurance 

programs. This demonstration preserved the program previously in place 

for Medicaid-eligible individuals and expanded coverage to uninsured 

adults; both programs were run through a managed care delivery system. 

The first program, called the Hoosier Healthwise Program, continued 

coverage for current Medicaid-eligible individuals. The second program, 

called Healthy Indiana Plan (HIP), expanded coverage for uninsured 

adults, not currently eligible for Medicaid. The expansion was partially 

funded using redirected DSH funding. The HIP provided a high-deductible 

health plan and an account similar to a health savings account for 

uninsured adults including low-income custodial parents and caretaker 

 

5

We estimated the total federal and state costs using the 2012 federal medical assistance 

percentage (FMAP).

6

Idaho was required by federal law to discontinue using the State Children’s Health 

Insurance Program (CHIP) funds to cover childless adults, but was allowed to continue 

services for this population with Medicaid funds under a new section 1115 demonstration.

Idaho Nonpregnant 

Childless Adults 

(Idaho Adult Access 

Card Demonstration)

Healthy Indiana Plan
Appendix II: A Summary of Key Features of 

Recent Demonstrations

Page 43 GAO-13-384 Medicaid Demonstration Waivers

relatives of Medicaid and State Children’s Health Insurance Program 

(CHIP) children, and uninsured noncustodial parents and childless adults 

ages 19 through 64 with incomes between 22 and 200 percent of the 

FPL.

Participation in HIP is voluntary, but all enrollees are required to receive 

medical care through the high-deductible health plans. HIP enrollees are 

required to help fund the $1,100 deductible by contributing to a savings 

account.7 These accounts are used by enrollees to pay for the cost of 

health care services until the deductible is reached; however, preventive 

services up to a maximum amount are exempt from this requirement. The 

benefits available under HIP are limited to $300,000 annually, and 

$1 million over a lifetime. The demonstration also included cost sharing 

depending on income.

Demonstration Term: January 2010–September 2014

Estimated Number of People Covered: first year: 74,379; 

last year: 90,665

Approved Spending Limit:

8

Michigan was approved under a new demonstration to continue providing 

a limited ambulatory benefit package through a managed care delivery 

system to low-income nonpregnant childless adults ages 19 through 

64 years with incomes at or below 35 percent of the FPL.

$1 billion

9

 

7

The contribution amounts range from 2 to 5 percent of income based on household 

income.

The benefit 

package included outpatient hospital services, physician services, 

diagnostic services, pharmacy, mental health and substance abuse 

services. Enrollees may be required to receive prior authorization before 

accessing certain ambulatory services.

8

We estimated the total federal and state costs using the 2012 federal medical assistance 

percentage (FMAP).

9

Michigan was required by federal law to discontinue using CHIP funds to cover childless 

adults, but was allowed to continue services for this population with Medicaid funds under 

a new section 1115 demonstration.

Michigan Childless 

Adults Waiver
Appendix II: A Summary of Key Features of 

Recent Demonstrations

Page 44 GAO-13-384 Medicaid Demonstration Waivers

Demonstration Term: July 2010–December 2013

Estimated Number of People Covered:

10

Approved Spending Limit: $105 million

not available

Missouri was approved to redirect its DSH funding to pay for four main 

activities in the St. Louis area: (1) health clinics that will provide services 

to the uninsured; (2) a health commission to manage activities related to 

the demonstration; and (3) a program to educate and encourage patients 

to use primary care rather than the emergency room. Lastly, the state 

was approved to expand coverage through a pilot that provides limited 

primary care benefits and a voucher system to provide acute hospital 

services to a population in the St. Louis area.

Demonstration Term: January 2010–September 2014

Estimated Number of People Covered:

11

Approved Spending Limit: $1.3 billion

29,770

New Mexico was approved under a new demonstration to continue to 

provide coverage for nonpregnant childless adults.12

 

10Information to estimate the number of people covered was not provided in the approval 

documentation. 

The eligible 

population is nonpregnant childless adults ages 19 to 64 years with 

incomes up to and including 200 percent of the FPL who are not eligible 

for Medicaid. Enrollees receive a comprehensive benefit package through 

a managed care delivery system in which premiums and copayments are 

required. These premiums include up to $35 for higher-income childless 

adults. The demonstration was designed to provide health care coverage 

11The state estimated that the demonstration would continue coverage for about 29,000 

childless adults. However, information to estimate the number of people covered for the 

first and last year of the demonstration was not provided. 

12New Mexico was required by federal law to discontinue using CHIP funds to cover 

childless adults, but was allowed to continue services for this population with Medicaid 

funds under a new section 1115 demonstration.

Missouri Gateway to 

Better Health

New Mexico State 

Coverage Insurance—

Title XIX Component
Appendix II: A Summary of Key Features of 

Recent Demonstrations

Page 45 GAO-13-384 Medicaid Demonstration Waivers

to uninsured individuals who are unemployed, self-employed, or 

employed by an employer with 50 or fewer employees.

Demonstration Term: January 2009–December 2013

Estimated Number of People Covered: first year: 192,778; 

last year: 206,540

Approved Spending Limit: $12.1 billion

Rhode Island was approved to operate its entire Medicaid program under 

a demonstration and to continue to provide coverage to populations that 

were previously covered under several distinct waivers.13 Rhode Island 

was allowed to redesign its Medicaid program to provide cost-effective 

services that will ensure beneficiaries receive the appropriate services in 

the least restrictive and most appropriate setting. For example, the state 

was allowed to form and pay for entities dedicated to reviewing the needs 

of enrollees eligible for long-term care. This organization helps enrollees 

decide how to manage their health care needs based on a distinction 

given to them as “highest need,” “high need,” or “preventive.” This 

designation allows the state to determine which cost-effective long-term 

services an enrollee can receive. For example, those designated as 

highest-need individuals are approved to receive nursing home care while 

those designated as preventive are approved to receive certain home 

health services. The state was also approved to include other services 

under the demonstration, such as parenting and childbirth education 

classes, tobacco cessation services, and window replacement for leadpoisoned children.

 

13These populations were previously covered under the state plan, a different section 

1115 demonstration, and other waivers including 1915(c) waivers. 

Rhode Island Global 

Consumer Choice 

Compact 
Appendix II: A Summary of Key Features of 

Recent Demonstrations

Page 46 GAO-13-384 Medicaid Demonstration Waivers

Demonstration Term: December 2011–September 2016

Estimated Number of People Covered: first year: 3,872,680; 

last year: 4,767,680

Approved Spending Limit: $142 Billion

The Texas demonstration allowed the state to both expand the use of a 

managed care delivery system to existing covered populations and to 

preserve supplemental payments through the establishment of funding 

pools. The state was allowed to claim approximately $29 billion over the 

5-year term of the demonstration on these pool payments. One pool was 

used to reimburse providers for uncompensated care costs, and the other 

was used to provide incentive payments to participating hospitals that 

implement and operate delivery system reforms.14 The state also was 

approved to cover children’s primary and preventive Medicaid dental 

services through a capitated statewide dental services program.

Demonstration Term: January 2009–December 2013

Estimated Number of People Covered: first year: 25,129; 

last year: 40,800

Approved Spending Limit: $797 million

Wisconsin obtained approval to redirect its DSH funding to expand 

coverage to childless adults, who are defined as individuals between the 

ages of 19 and 64 years with income that does not exceed 200 percent of 

the FPL. The program included a variety of features: a requirement for 

 

14The incentive payments were intended to help the state and health care providers 

prepare for the expected increase in population after the Medicaid expansion under the 

Patient Protection and Affordable Care Act (PPACA) is fully implemented in 2014. At the 

time Texas’s demonstration was approved, PPACA required all states to expand Medicaid 

coverage to a broader category of low-income individuals beginning in January of 2014. 

However, subsequent to this approval, a ruling by the U.S. Supreme Court essentially 

made the expansion a choice for the states. See National Federation of Independent 

Business, et al., vs. Sebelius, Sec. of Health and Human Services, et al., 132 S. Ct. 2566 

567 (U.S. June 28, 2012). In July of 2012, the Governor of Texas sent a letter to HHS 

stating that the state did not intend to expand Medicaid. In addition, in June 2013, a state 

law was enacted that would prohibit the state Medicaid agency from expanding Medicaid 

coverage.

Texas Healthcare 

Transformation and 

Quality Improvement 

Program 

Wisconsin 

BadgerCare Plus for 

Childless Adults
Appendix II: A Summary of Key Features of 

Recent Demonstrations

Page 47 GAO-13-384 Medicaid Demonstration Waivers

participants to complete a health needs assessment—used to match 

enrollees with health maintenance organizations and providers that meet 

the individual’s specific health care needs; tiering of health plans based 

on quality of care indicators; and enhanced online and telephone 

application tools that allow childless adults to choose from a variety of 

health insurance options.
Appendix III: Comments from the Department 

of Health and Human Services

Page 48 GAO-13-384 Medicaid Demonstration Waivers

Appendix III: Comments from the 

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

of Health and Human Services

Page 49 GAO-13-384 Medicaid Demonstration Waivers
Appendix III: Comments from the Department 

of Health and Human Services

Page 50 GAO-13-384 Medicaid Demonstration Waivers
Appendix III: Comments from the Department 

of Health and Human Services

Page 51 GAO-13-384 Medicaid Demonstration Waivers
Appendix III: Comments from the Department 

of Health and Human Services

Page 52 GAO-13-384 Medicaid Demonstration Waivers
Appendix IV: GAO Contact and Staff 

Acknowledgments

Page 53 GAO-13-384 Medicaid Demonstration Waivers

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

In addition to the contact named above, Tim Bushfield, Assistant Director; 

Susan Barnidge; Shirin Hormozi; Carolyn Feis Korman; Drew Long; 

Tom Moscovitch; Pauline Seretakis; and Hemi Tewarson made key 

contributions to this report.

Appendix IV: GAO Contact and Staff 

Acknowledgments 

GAO Contact

Staff 

Acknowledgments 
Related GAO Products

Page 54 GAO-13-384 Medicaid Demonstration Waivers

High-Risk Series: An Update. GAO-13-283. Washington, D.C.: February 

2013.

Medicaid: More Transparency of and Accountability for Supplemental 

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

2012.

Medicaid: States Reported Billions More in Supplemental Payments in 

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

Medicaid Demonstration Waivers: Recent HHS Approvals Continue to 

Raise Cost and Oversight Concerns. GAO-08-87. Washington, D.C.: 

January 31, 2008.

Medicaid Demonstration Waivers: Lack of Opportunity for Public Input 

during Federal Approval Process Still a Concern. GAO-07-694R. 

Washington, D.C.: July 24, 2007.

Medicaid Waivers: HHS Approvals of Pharmacy Plus Demonstrations 

Continue to Raise Cost and Oversight Concerns. GAO-04-480. 

Washington, D.C.: June 30, 2004.

Medicaid: Improved Federal Oversight of State Financing Schemes Is 

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

SCHIP: HHS Continues to Approve Waivers That Are Inconsistent with 

Program Goals. GAO-04-166R. Washington, D.C.: January 5, 2004.

Medicaid and SCHIP: Recent HHS Approvals of Demonstration Wavier 

Projects Raise Concerns. GAO-02-817. Washington, D.C.: July 12, 2002.

Medicaid Section 1115 Waivers: Flexible Approach to Approving 

Demonstrations Could Increase Federal Costs. GAO/HEHS-96-44. 

Washington, D.C.: November 8, 1995.

Medicaid: States Use Illusory Approaches to Shift Program Costs to 

Federal Government. GAO/HEHS-94-133. Washington D.C.: August 1, 

1994.

Related GAO Products

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