Medicaid Waivers: HHS Approvals of Pharmacy Plus Demonstrations Continue to Raise Cost and Oversight Concerns
Published: 2004-06-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Under section 1115 of the Social Security Act, the Secretary of Health and Human Services may waive certain Medicaid requirements for states seeking to deliver services through demonstration projects. By policy, these demonstrations must not increase federal spending. GAO has previously reported concerns with HHS's approval process. GAO was asked to provide information on a new Medicaid section 1115 demonstration initiative called Pharmacy Plus, intended to allow states to cover prescription drugs for seniors not otherwise eligible for Medicaid. GAO reviewed the (1) approval status of state proposals, (2) extent to which HHS ensured that demonstrations are budget neutral, (3) basis for savings assumptions, and (4) federal and state steps to evaluate and monitor the demonstrations.
section_title: What GAO Found
paragraphs: From January 2002 through May 2004, HHS reviewed Pharmacy Plus proposals from 15 states and approved four: Florida, Illinois, South Carolina, and Wisconsin. These demonstrations offer prescription drug coverage to low-income seniors not otherwise eligible for Medicaid. HHS denied proposals from Delaware and Hawaii as inconsistent with demonstration guidelines; most of the rest were not under active review because HHS had not determined how new Medicare prescription drug legislation will affect proposed or operating Pharmacy Plus demonstrations. Over 5 years, the four approved demonstrations will provide prescription drug coverage to half a million low-income people age 65 or older, at a projected cost of about $3.6 billion, of which the federal share would be about $2.1 billion. HHS has not adequately ensured that the four approved demonstrations will be budget neutral, that is, that the federal government will not spend more with the demonstrations than without them. HHS approved the demonstrations' 5-year spending limits using projections of cost and beneficiary enrollment growth that exceeded benchmarks that HHS said it considered in assessing budget neutrality, specifically, states' recent average growth rates and projections for Medicaid program growth nationwide. Neither HHS's negotiations with the states nor its rationale for approving higher growth rates is documented. Using the benchmark growth rates, GAO estimates that none of the four demonstrations will be budget neutral and federal spending may increase significantly, for example, by more than $1 billion in Illinois and $416 million in Wisconsin over 5 years. Unrealistic savings assumptions also contribute to demonstration spending limits that are not likely to be budget neutral. States assumed that keeping low-income seniors healthy--thus preventing them from spending down their financial resources on health services and "diverting" them from Medicaid eligibility--would generate sufficient savings to offset the increased costs of providing a new drug benefit. GAO found neither state experience nor other research to support such savings. Without state-specific evidence, HHS approved savings assumptions for the four states ranging from $480 million to $2 billion per state over 5 years. Had more conservative assumptions been used to estimate demonstration savings, the proposals likely could not have been approved as budget neutral. Efforts by the states and HHS to evaluate and monitor the Pharmacy Plus demonstrations are in their early stages. The four states have taken few steps to put their own required evaluation plans into practice, and an independent evaluation contracted by HHS and started in October 2002 is scheduled to report in September 2005. In the interim, HHS has not ensured that all states meet requirements for progress reporting on the demonstrations. The information that states have submitted is often insufficient for determining whether the demonstrations are operating as intended, and this shortcoming will limit HHS's oversight capability.

section_title: Letter
paragraphs: Under section 1115 of the Social Security Act (SSA), the Secretary of  Health and Human Services may waive certain statutory requirements for  Medicaid—the joint federal and state program financing health care for  low-income families, certain seniors, and disabled individuals—in  connection with experimental, pilot, or demonstration projects that are  likely to promote program objectives. Because of the projects’  experimental nature, the Department of Health and Human Services (HHS)  requires demonstrations authorized under section 1115 to include  measurable objectives and an evaluation component. In addition, since the  early 1980s, HHS has required states to show that their proposals for  section 1115 demonstrations are “budget neutral” for the federal  government: that is, a proposed demonstration cannot raise federal  expenditures beyond what they would be under a state’s existing program.
In January 2002, HHS announced the Medicaid Pharmacy Plus section  1115 demonstration initiative, offering states the opportunity to provide a  prescription drug benefit to two groups—seniors (people age 65 or older)  and disabled individuals—whose incomes, although low, exceed levels  that would qualify them for full Medicaid eligibility. Under this initiative,  HHS and the Centers for Medicare & Medicaid Services (CMS), the agency  within HHS that has primary responsibility for reviewing the  demonstration proposals, encourage states to test over 5 years whether  extending a drug benefit to seniors who are not eligible for Medicaid  would maintain these seniors’ health and hold down overall Medicaid  costs.
Over the past decade, Congress and others have raised concerns about the  extent to which HHS has ensured that approved section 1115  demonstration waivers promote the goals and fiscal integrity of both  Medicaid and the State Children’s Health Insurance Program (SCHIP). In  particular, Congress has been concerned about HHS’s waiver approval  process and the federal costs associated with some of the demonstrations.  Our past work has found, for example, that HHS’s process for approving  demonstrations is not always clear or open to public input and that the  department has not always ensured the budget neutrality of approved  demonstrations, thereby raising federal expenditures.
You asked us for information on the Pharmacy Plus initiative. We focused  our review on the following four questions:  1.  How many states have applied for Pharmacy Plus demonstration  waivers, and what is the status of their proposals?  2.  To what extent has HHS ensured that the approved demonstrations are  budget neutral to the federal government?  3.  How well supported are states’ assumptions about savings that may  accrue to Medicaid from the Pharmacy Plus demonstration waivers?  4.  What steps are states and HHS taking to evaluate approved  demonstrations and to monitor if they are functioning as intended?
Our work is based on a review and analysis of Pharmacy Plus  demonstration waiver proposals considered and approved by HHS from  January 2002 through May 2004. Our analysis covers only demonstration  proposals submitted in response to HHS’s Pharmacy Plus initiative. To  determine the status of demonstrations under this initiative, we analyzed  HHS data on all proposals it considered, including their number,  outcomes, and characteristics. For approved demonstrations, we analyzed  the applications as submitted by the states; HHS decision memorandums  and approval letters; the applications as ultimately approved; HHS’s terms  and conditions for approved demonstrations; and, when available, the  states’ plans (called operational protocols) for how the demonstrations  will operate. We also discussed the process of review and approval with  officials of the reviewing agencies—HHS, CMS, and the Office of  Management and Budget (OMB)—and we obtained information from  officials representing the states with approved demonstrations. To assess  budget neutrality, we obtained available budget justifications and  documentation from state and federal officials and discussed with them  the budget negotiations associated with each approved demonstration. To  examine the assumptions behind the initiative and the likelihood of  associated savings, we reviewed published literature and interviewed  officials from the Kaiser Commission on Medicaid and the Uninsured and  the Congressional Budget Office (CBO). We discussed plans for evaluating  the approved demonstrations with HHS and state officials. During our  review, Congress passed the Medicare Prescription Drug, Improvement,  and Modernization Act of 2003, which adds a drug benefit to Medicare, the  federal program providing health insurance for the majority of people age  65 or older regardless of income. We considered the limited information  available as of May 2004 about the relationship between Pharmacy Plus  and the act. We conducted our work from December 2002 through June  2004 in accordance with generally accepted government auditing  standards.
subsections: section_title: Background
paragraphs: Established in 1965 under title XIX of SSA, Medicaid is the nation’s health  care financing program for low-income families and certain people who  are age 65 or older or disabled. The program accounted for about   $244 billion in federal and state expenditures in fiscal year 2002 and  covered an estimated 53 million people. The states and the federal  government share Medicaid spending according to a formula that provides  a more generous federal match for states where per capita income is  lower.
Medicaid is an open-ended entitlement program, meaning that the federal  government is obligated to pay its share of expenditures for all people and  services covered under an HHS-approved state Medicaid plan. To qualify  for federal matching payments, state Medicaid programs are required by  law to cover certain categories of beneficiaries, including pregnant women  and children with family incomes below specific limits, as well as  individuals with limited income and assets who are age 65 or older or  disabled. State programs are also required to cover certain services,  including physician and hospital services and nursing home care. As long  as states meet federal requirements and obtain HHS approval for their  state Medicaid plans, they have considerable flexibility in designing and  operating their programs. For example, states may choose to expand  coverage to seniors whose incomes are above statutory limits, and all  states have opted to provide prescription drug coverage. In addition,  section 1115 of SSA permits the Secretary of HHS to waive certain  statutory requirements applicable to Medicaid to allow states to provide  services or cover individuals not otherwise eligible for Medicaid and to  provide federal funding for services and populations not usually eligible  for federal matching payments.
The Pharmacy Plus initiative allows states to provide a prescription drug  benefit to certain Medicare beneficiaries, specifically seniors and disabled  people, with incomes at or below 200 percent of FPL. Typically, Medicaid  eligibility under an approved state plan provides access to all state  Medicaid-covered services, but eligibility under a Pharmacy Plus  demonstration covers only a prescription drug benefit. The premise  behind the initiative is that expanded access to medically necessary drugs  will help keep low-income seniors healthy enough to avoid medical  expenses that could cause them to “spend down” their resources to the  point of Medicaid eligibility. The initiative assumes that budget neutrality  for pharmacy-only coverage can be achieved by savings to Medicaid from  fewer seniors’ enrolling for full benefits, as well as from improved access  to prescription drugs, improved service delivery or medication  management, and better management of drug benefit costs.
Unlike some other section 1115 demonstration waivers, the Pharmacy Plus  initiative requires a participating state to accept a fixed spending limit as  part of its budget neutrality agreement with HHS. This spending limit— sometimes called an aggregate spending limit or global budget cap— applies not only to services and beneficiaries in the state’s demonstration  drug program, but also to all services for all Medicaid seniors in the state.  The Pharmacy Plus budget neutrality approach limits the amount the  federal government will match for a demonstration according to expected  growth in both service costs and enrollment (see app. I). Once a state has  reached its Pharmacy Plus spending limit, it cannot receive additional  federal matching dollars for any Medicaid services for seniors in the state,  nor can the state restrict enrollment of seniors who qualify for full  Medicaid benefits. Under the Pharmacy Plus scenario, a state accepts the  financial risks inherent in a fixed budget cap for unanticipated changes in  both cost and enrollment growth. For some other section 1115  demonstrations, budget neutrality is based on a projected per capita cost  for each demonstration beneficiary. This other scenario sets a limit on  spending per person, but because federal matching funds are available for  all people who enroll, a state does not have to accept financial risk for  unexpected growth in enrollment.
section_title: HHS Has Reviewed 15 Pharmacy Plus Proposals and Approved 4
paragraphs: As of May 2004, HHS had approved four states’ Pharmacy Plus  demonstration proposals, denied two, and considered proposals from nine  other states. All four approved demonstrations—Florida, Illinois, South  Carolina, and Wisconsin—are to operate for 5 years, during which time  they might enroll a total of half a million low-income individuals age 65 or  older for the new prescription drug coverage. HHS denied two  demonstration proposals, from Delaware and Hawaii, because they were  not consistent with Pharmacy Plus guidelines. Of the remaining nine  proposals, one was withdrawn by the state and others have been on hold  since fall 2003, when Congress was considering Medicare prescription  drug legislation. At the time we completed our work, legislation providing  a new drug benefit through Medicare had been enacted, but HHS had not  determined how the new drug program would affect the Pharmacy Plus  initiative.
subsections: section_title: HHS Approved Four Pharmacy Plus Demonstrations
paragraphs: HHS has approved Pharmacy Plus demonstrations for low-income seniors  in four states: Florida, Illinois, South Carolina, and Wisconsin. As of May  2004, all four demonstrations had been implemented and under way for at  least 17 months: Illinois’, Florida’s, and Wisconsin’s demonstrations were  implemented in 2002, South Carolina’s in 2003 (see table 1). Together, the  four approved demonstrations are projected to enroll as many as 527,800  individuals for Medicaid prescription drug benefits only; as of April 2004,  they reported combined enrollment of nearly 372,200 people. Illinois’  demonstration is the largest, with expected enrollment for the drug benefit  of more than 250,000 seniors over 5 years. As of April 2004, more than  192,600 people were enrolled in Illinois’ demonstration, the majority of  them moved into the Medicaid program from an existing state-funded  pharmacy assistance program.
All the demonstrations except Florida’s are approved to enroll seniors  with incomes at or below 200 percent of FPL, the maximum eligible  income established in HHS’s Pharmacy Plus guidance. As approved,  Florida’s demonstration covers seniors with incomes from 88 to   120 percent of FPL, but in September 2003, the state submitted an  amendment to expand income eligibility to 200 percent of FPL. Illinois  also applied in March 2003 to amend its approved demonstration to  expand eligibility, in its case to include seniors with incomes at or below  250 percent of FPL. The terms of Illinois’ demonstration approval  specifically permit the state to seek this amendment, as long as the state  submits data supporting its ability to cover this expansion population at no  additional cost to the federal government. As of March 2004, HHS was  reviewing both amendments.
Projected 5-year costs vary among the four approved demonstrations. For  Florida, Illinois, South Carolina, and Wisconsin, total combined federal  and state Medicaid spending on the new drug benefit alone is expected to  be more than $3.6 billion over 5 years, of which the federal share would be  approximately $2.1 billion. The combined federal and state Medicaid  spending limits for the four demonstrations—for services to all Medicaid  seniors in the four states—would total $44 billion over 5 years, with a  federal share of at least $25 billion. The estimated 5-year costs solely for  the drug benefit range from $477 million in Florida to $1.4 billion in  Illinois, and combined 5-year federal and state spending limits (based on  projected costs for services to all Medicaid seniors) range from $5.0 billion  in South Carolina to $16.7 billion in Florida.
When they applied, three of the four states with approved demonstrations  already operated state-funded pharmacy assistance programs for seniors.  Most beneficiaries eligible for these programs are also eligible for  Pharmacy Plus coverage. HHS allows the states to subsume all or a  portion of an existing program under a demonstration, as long as the  states’ demonstrations propose to expand either the number of  beneficiaries or the scope of drug coverage. In other words, the state may  not simply secure federal matching dollars for the costs of an existing  state-funded drug program with no expansion. To meet this condition,  states with approved demonstrations either raised income eligibility  thresholds or expanded the scope of drug coverage beyond that of their  existing state programs. For example, Florida doubled its maximum  monthly benefit from $80 to $160 per person, and South Carolina  expanded eligibility to include seniors with incomes from 175 through   200 percent of FPL. Illinois’ demonstration offered a more comprehensive  drug benefit than its state-funded program did. Wisconsin did not  previously have a state-funded pharmacy assistance program for seniors.
section_title: HHS Denied Two Demonstration Proposals
paragraphs: In 2003, HHS denied Pharmacy Plus demonstration proposals from two  states, Delaware and Hawaii. (See app. II for descriptions of denied,  withdrawn, and pending proposals.) Delaware’s proposal was denied  primarily because HHS required that the state expand beyond the existing  state-funded program and limit coverage to seniors with incomes at or  below 200 percent of FPL. Delaware’s state-funded pharmacy assistance  program already covered seniors and disabled adults with incomes up to  200 percent of FPL or whose prescription drug costs exceeded 40 percent  of their annual incomes. For this reason, the state could not expand either  eligibility or coverage and stay within Pharmacy Plus guidelines. Although  Delaware proposed adding a pharmacy benefit management component to  monitor appropriate prescription use and to control costs, HHS found this  proposed change to the existing program insufficient.
Hawaii proposed to make prescription drugs available at the discounted  Medicaid rate to state residents of all ages with family incomes at or below  300 percent of FPL. This benefit was to be funded through participant cost  sharing, manufacturer rebates, and a fixed state contribution of $1 per  prescription. HHS’s denial was based primarily on the request to cover  individuals with incomes up to 300 percent instead of 200 percent of FPL.  Other reasons for the denial included the proposed coverage for all state  residents, instead of targeting seniors and people with disabilities, and the  minimal state financial participation of $1 per prescription in the first year  of the demonstration.
section_title: HHS Has Considered Nine Other Demonstration Proposals
paragraphs: From January 2002 through May 2004, HHS considered Pharmacy Plus  demonstration proposals from nine other states: Arkansas, Connecticut,  Indiana, Maine, Massachusetts, Michigan, New Jersey, North Carolina, and  Rhode Island. As of May 2004, eight were still pending; one proposal, from  Massachusetts, had been withdrawn. Most proposals would cover seniors  with incomes at or below 200 percent of FPL; several would also cover  adults with disabilities. The drug benefits would generally be  comprehensive and require participant cost sharing, which in some cases  would include an annual enrollment fee and 20 percent co-payment for  each prescription. All but one of the states with pending proposals have  state-funded pharmacy assistance programs that they propose to include  in whole or in part in their demonstrations. (App. II describes these  demonstration proposals.)
As of May 2004, most of the pending proposals were not under active  review by HHS primarily because the department had not determined the  effect of the Medicare prescription drug legislation on the Pharmacy Plus  demonstration proposals. HHS officials told us in October 2003 that  Arkansas, Rhode Island, and Indiana officials had asked that review of  their states’ proposals be put on hold until after Congress had completed  consideration of the Medicare legislation. At that time HHS was still  reviewing a proposal from North Carolina but regarded proposals from  four other states as inactive because longtime negotiations with those  states had reached an impasse. Connecticut and New Jersey, for example,  already had broad state-funded drug coverage for seniors with incomes up  to 200 percent of FPL. In such cases, HHS has been unwilling to approve  federal financing for existing state-funded programs.
section_title: Medicare Prescription Drug Legislation May Affect Pharmacy Plus Initiative
paragraphs: The Medicare Prescription Drug, Improvement, and Modernization Act of  2003 (MMA) will provide seniors access to a Medicare-covered  prescription drug benefit and will likely affect how HHS and the states  manage the Medicaid Pharmacy Plus initiative. This law gives Medicare  beneficiaries the opportunity to enroll for prescription drug coverage to  begin on January 1, 2006, and, as an interim measure, the opportunity to  enroll for Medicare-endorsed drug discount cards beginning in June 2004.  It also directs HHS to establish effective coordination between Medicare  plans and state Medicaid and pharmacy assistance programs and to  establish a commission to address these and other transition issues. In  2006, the Medicare drug benefit will replace Medicaid as the primary  source of prescription drug coverage for low-income seniors who would  have been eligible for both full benefits under Medicaid and drug benefits  under Medicare plans. Under MMA, individuals with limited assets and  incomes below 150 percent of FPL will be eligible for federal subsidies to  assist with the drug benefit’s cost-sharing requirements. But because  Pharmacy Plus demonstrations in Illinois, South Carolina, and Wisconsin  cover individuals with incomes above 150 percent and at or below   200 percent of FPL regardless of other assets, some current demonstration  beneficiaries may not qualify for these subsidies. Pharmacy Plus  beneficiaries are likewise ineligible for the Medicare drug discount cards.
As of May 2004, HHS indicated it was considering how enactment of the  new law would affect Pharmacy Plus demonstrations and proposals.  Officials from the four states with approved demonstrations told us in  December 2003 that they were uncertain how the law would affect their  demonstrations, but they had no plans to end the demonstrations early.  After the Medicare prescription drug benefit begins in 2006, some  demonstrations could be discontinued or modified. Early termination  could have an impact on the demonstrations’ budget neutrality, which  often depends on savings in later years to offset higher start-up costs.  Officials in Illinois and Florida indicated in December 2003 that their  pharmacy demonstrations might be converted to state-funded programs in  2006.
section_title: HHS Has Not Ensured That Approved Demonstrations’ Spending Limits Will Be Budget Neutral
paragraphs: HHS has not adequately ensured that the spending limits it has approved  for Pharmacy Plus demonstrations will be budget neutral—in other words,  that the federal government will spend no more under the demonstrations  than without them. For all four demonstrations, HHS approved 5-year  spending limits based on projections of cost and beneficiary enrollment  growth that exceeded benchmarks that department officials told us they  considered in assessing the reasonableness of states’ demonstration  proposals. These cost and enrollment growth benchmarks incorporate  states’ historical experience and expectations for Medicaid program  growth nationwide. The discrepancies between the growth benchmarks  and the approved growth rates were greatest for Illinois and Wisconsin.  Neither HHS’s negotiations with the states nor the department’s rationale  for approving higher-than-benchmark growth rates is well documented.  Had HHS based the 5-year demonstration spending limits on the  benchmark growth rates, the federal share of approved spending would be  considerably lower, particularly for Illinois and Wisconsin: specifically,   $1 billion lower in Illinois and $416 million lower in Wisconsin. For  Florida and South Carolina, the federal share of approved spending would  have been $55 million and $42 million lower, respectively.
subsections: section_title: HHS Approved Projected Growth Rates Exceeding Benchmarks
paragraphs: HHS based the Pharmacy Plus demonstration spending limits it approved  on a range of estimated future growth rates for cost per beneficiary and  for enrollment, which in some cases exceeded benchmarks the  department told us it considered in assessing the reasonableness of states’  proposals. A standard Pharmacy Plus application form developed by HHS  and a technical guidance document are the chief sources of criteria and  formal guidance to states for developing demonstration proposals. But  HHS has not established written criteria for how it reviews and approves  the growth rates that states propose. These growth rates are key elements  in the budget neutrality negotiations between states and the federal  government because higher rates result in more generous spending limits,  which represent the federal government’s agreed-on maximum spending  for all the states’ Medicaid seniors during the demonstrations. An  inappropriately high spending level can represent a higher federal liability  than warranted.
The process used by HHS and the states to determine whether states’  proposed Pharmacy Plus demonstrations will be budget neutral requires  comparing two cost estimates: (1) projected 5-year costs of a state’s  existing Medicaid program for seniors (“without-demonstration costs”)  and (2) projected 5-year costs of the state’s existing program plus the drug  benefits and beneficiaries added by the demonstration (“with- demonstration costs”). These calculations factor in projected growth in  costs and enrollment each year. As long as projected with-demonstration  costs do not exceed projected without-demonstration costs, the  demonstration can be approved as budget neutral. As a result, the  projected costs of a state’s existing, without-waiver Medicaid program for  seniors effectively sets the spending limit for all services provided to all  Medicaid seniors in the state for the 5-year demonstration term.   Appendix I outlines the basic steps HHS follows in setting Pharmacy Plus  demonstration spending limits.
To determine budget neutral spending limits for the pharmacy  demonstrations, HHS officials told us they consider the following for  estimating growth in costs and enrollment through the course of the  demonstrations:    For cost growth per beneficiary, similar to guidelines for other types of  section 1115 demonstrations, HHS seeks to approve a growth rate equal  to the lower of either the state’s historical average annual growth in per- beneficiary cost (that is, the average annual rate for the 5 years before the  demonstration proposal) or the nationwide projected growth rate,  developed by CMS’s Office of the Actuary, for Medicaid cost per  beneficiary age 65 or older.
For enrollment growth, HHS considers the state’s historical average  annual growth in enrollment as a starting point and, to a lesser extent, the  CMS Actuary’s nationwide rate, but it allows states to present a rationale  for a higher rate that anticipates rising future enrollments.
HHS’s approved growth rates in some cases exceeded these benchmarks  (see table 2). For per-beneficiary cost growth rates in Florida, Illinois, and  Wisconsin, HHS did not approve the lower of either the state’s historical  average rate or the CMS Actuary’s rate of 6.3 percent. Similarly, for  beneficiary enrollment growth rates, HHS approved rates for Illinois and  Wisconsin that exceeded both the states’ historical experience and the  CMS Actuary’s 1.8 percent projected annual growth rate. In Illinois’ case,  the approved rate for beneficiary enrollment growth—5 percent per year  over the 5-year demonstration—was considerably higher than the state’s   5-year historical average enrollment growth of 1.6 percent per year.
section_title: Basis for Approved Spending Limits Not Clear or Well Documented
paragraphs: HHS’s basis is unclear for approving growth rates higher than the  benchmarks in some cases, particularly for approving higher enrollment  growth rates for Illinois and Wisconsin. The department’s negotiation  process with these two states, during which officials reached agreement  on allowed growth rates, was not documented, nor was its rationale for  approving rates that differed from the lower of state historical experience  or the CMS Actuary’s projections. In particular, HHS’s internal decision  memorandums—which described the factors that HHS, CMS, OMB, and  others considered in reviewing the demonstrations and which are not  publicly available—did not provide the rationale for the approved  spending limits, and neither did the publicly available demonstration  approval letters.
HHS and state officials told us that Illinois and Wisconsin used a variety of  arguments to convince the department that their situations warranted  higher enrollment growth rates. But the states provided little specific  documentation to HHS or to us to support these arguments. For example:  Illinois asserted that its projected annual enrollment growth rate for the  demonstration years from 2002 through 2007 should be significantly higher  than its 5-year average historical growth rate of 1.6 percent, because  income eligibility levels for seniors in its Medicaid program increased from  41 to 100 percent of FPL from July 2000 through July 2002. As support, the  state provided HHS with updated Medicaid enrollment data—which were  more recent than those included in the original demonstration application  and showed increased growth rates for seniors compared with earlier  years—but these rates were still lower than the 5 percent HHS approved  and did not raise the historical average to 5 percent. The state did not  provide documents with actuarial projections of the estimated number of  people expected to enroll in Medicaid because of the change in eligibility  criteria. Illinois justified applying the 5 percent annual growth rate to all   5 years of the pharmacy demonstration by providing a chart showing that  enrollment in a different state program, SCHIP, had grown more than   5 percent per year on average for 3 years after that program’s eligibility  criteria were expanded. In our view, however, Illinois’ SCHIP enrollment  experience with children does not provide a reasonable basis for  predicting enrollment by seniors in the Pharmacy Plus demonstration.
Wisconsin asserted that its projected annual enrollment growth rate for  the demonstration years should be significantly higher than either its   5-year unadjusted historical growth rate of 0.01 percent or the 0.12 percent  rate based on 3 years of historical data reported in its application because  of the anticipated effects of a nationwide Social Security Administration  mail outreach program to low-income Medicare beneficiaries. This  outreach program informed seniors enrolled in Medicare about other  benefits, including Medicaid assistance for Medicare cost-sharing  requirements, for which they might qualify. Wisconsin officials told us  they proposed a 4 percent future annual enrollment growth rate for  seniors in the expectation that this outreach program, along with factors  including an aging population and the economic downturn, would increase  Medicaid enrollment. According to HHS, Wisconsin did not document any  projections of how many newly eligible Medicaid individuals could be  prompted to enroll after the Social Security Administration outreach  mailing. Instead, it submitted information based on a review of a similar  outreach effort in Minnesota. According to Wisconsin state officials,  during negotiations HHS proposed 1 percent as a more reasonable growth  rate, and HHS and state officials agreed to an approved enrollment growth  rate of 2 percent per year. Our related work suggests that Wisconsin may  be justified in claiming some increase in Medicaid enrollment as a result of  the outreach program, but the effect appears to be less than 1 percent.  Notably, although the Social Security Administration mail outreach  program was nationwide, HHS did not consider its effects when approving  enrollment rates for other states.
section_title: Demonstration Spending Limits Would Be Lower if Based on Benchmark Rates
paragraphs: Application of benchmark rates for projected per-beneficiary cost and  enrollment growth would have produced lower spending limits for all four  approved Pharmacy Plus demonstrations (see table 3). Benchmark-based  limits on combined federal and state spending would be approximately   $3 billion lower over 5 years than what HHS approved for the four  demonstrations, and the federal share alone would come to about   $1.6 billion less. The higher-than-benchmark growth rates HHS approved  for Illinois and Wisconsin accounted for most of these differences. Had the  spending limit for Illinois’ demonstration, in particular, been based strictly  on the benchmark rates, combined federal and state spending would have  been almost $2.2 billion, or 15 percent, lower, and the federal  government’s liability under the demonstration (at the state’s 50 percent  federal matching rate) lower by more than $1 billion. The difference is less  pronounced for Wisconsin, where the approved federal and state spending  limit exceeds what it would have been had benchmark rates been applied  by about $713 million, translating into about $416 million in additional  federal spending.
The spending limits HHS approved for Illinois and Wisconsin exceed  estimates based on consistent application of the benchmark growth rates  by 15.4 percent and 8.5 percent, respectively. The limits approved for  Florida and South Carolina, while not budget neutral compared with the  benchmark spending estimates, reflect relatively small differences.  Florida’s approved spending limit exceeds the benchmark estimate by less  than 1 percent—$94 million of a 5-year approved federal and state  spending limit of nearly $16.7 billion—and South Carolina’s approved  spending limit exceeds the benchmark by 1.2 percent, or $60 million.
CBO has similarly reported that Pharmacy Plus demonstrations are likely  to increase federal Medicaid spending. Before passage of MMA, CBO  estimated that the Pharmacy Plus demonstrations would add about   $18 billion to federal Medicaid spending over the 10 years from 2004  through 2013. According to CBO officials, the agency considered a range  of scenarios for how the initiative might grow with new demonstration  approvals and estimated the initiative’s overall effect on Medicaid  spending. The officials told us that CBO did not include any of the  demonstrations’ projected savings in its analysis because it did not find the  argument that savings would occur convincing.
section_title: Pharmacy Plus Savings Assumptions Not Well Supported
paragraphs: Neither data from state experience nor other research supports the  savings assumptions necessary for budget neutrality in the Pharmacy Plus  demonstrations. In developing their demonstration proposals, states  assumed that keeping low-income seniors healthy—thus preventing them  from spending down their financial resources on health services and  “diverting” them from Medicaid eligibility—would generate savings to help  offset the increased costs of providing a new drug benefit. Without state- specific evidence, HHS approved savings assumptions negotiated with the  states, including significant projected reductions in Medicaid senior  enrollment. But the limited research available suggests that potential  health care savings due to improved access to prescription drugs are likely  to be much less than the levels the states assumed and HHS approved. Had  more conservative savings assumptions been used to estimate the  demonstrations’ costs, the proposals likely could not have been approved  as budget neutral. Moreover, concerns have arisen about what actions  states might take to control spending on behalf of seniors if estimated  savings do not accrue and states reach or exceed their spending limits  under the demonstrations.
subsections: section_title: HHS-Approved Savings Assumptions Are Not Supported by State Experience
paragraphs: The approved Pharmacy Plus demonstrations count on expected savings  based on reductions in the projected number of seniors who will enroll in  states’ Medicaid programs—ranging from a 3 percent reduction in Florida  to a 25 percent reduction in South Carolina over the demonstrations’   5 years. The dollar amounts of combined federal and state savings  projected under these assumptions in the demonstrations’ budget  neutrality calculations range from $480 million in Florida to $2 billion in  Illinois (see table 4).
To project the extent to which Pharmacy Plus would reduce its new  enrollment of Medicaid seniors, and thus its total senior enrollment,  Florida made the relatively conservative assumption that the drug benefit  would enable seniors to avoid Medicaid eligibility for 1 year; after 5 years,  the state’s total projected number of Medicaid seniors would be 5,900   (3 percent) lower with the demonstration than without it. The other states,  in contrast, assumed that everyone diverted in each year of their  demonstrations would remain out of Medicaid throughout the full  demonstration period and would not, for example, enter a nursing home,  which often results in Medicaid eligibility. As a result, Illinois, South  Carolina, and Wisconsin projected reductions of nearly 20 percent or more  in Medicaid senior enrollments at the end of 5 years. Had these states  made more conservative assumptions—assuming, for example, as Florida  chose to, that providing access to prescription drugs would delay seniors’  entry into Medicaid by only 1 year instead of 5—their projected with- demonstration costs would have exceeded projected without- demonstration costs and would not have been budget neutral.
Although states’ demonstration proposals aim to achieve savings by  expanding seniors’ access to prescription drugs and improving their  health, in practice it appears that some states’ estimates of expected  savings may have been derived in part by determining how much in  savings was needed to demonstrate budget neutrality. In their proposals,  none of the three states that previously had state-funded pharmacy  assistance programs (Florida, Illinois, and South Carolina) provided data  from those programs that specifically supported such high projected  savings. Based on conversations with Wisconsin health care financing  officials and a review of documents, we found that the state’s  demonstration savings estimates were a residual of the budget-negotiating  process, derived from determining how much was needed in savings to  demonstrate budget neutrality, rather than from research or data about  what was realistic.
section_title: Premise behind Approved Demonstrations Not Well Supported by Research
paragraphs: The premise that Pharmacy Plus demonstrations will generate savings by  keeping low-income seniors from becoming Medicaid-eligible is not  supported by research. In a previous report, we reviewed the research  studies cited in Illinois’ demonstration proposal and found that they did  not sufficiently support the state’s theory that a full drug benefit for low- income seniors would yield the projected level of savings. Although these  studies indicated that access to prescription drugs benefited people in  poor health, they all focused on people who already had specific  diagnosed conditions, such as diabetes, heart disease, or HIV, rather than  on a general population of seniors. An extensive 2003 review of research  examining drug coverage for low-income seniors found relatively few  studies about the effect on Medicaid spending of expanded access to a  broad prescription drug benefit. The one study this review considered  most relevant, conducted in the mid-1980s, assessed Pennsylvania’s state- funded program, Pharmaceutical Assistance Contract for the Elderly  (PACE), and found that despite high enrollment, Medicaid entry among  PACE participants was neither prevented nor delayed enough to have a  discernible effect on the state’s overall Medicaid budget. Other studies of  broad prescription drug benefits for low-income seniors, including one of  New York’s program, found some reductions in participants’ health care  costs but mainly for inpatient hospital care, which, for people age 65 or  older, is covered by Medicare rather than Medicaid. Still other studies in  this review examined the more limited question of how access to  appropriate drugs affects people already suffering from specific illnesses.  Such research sheds little light on the cost-effectiveness of offering  comprehensive drug benefits to a broad population of low-income seniors.
Some states that have not submitted Pharmacy Plus proposals examined  the diversion and savings assumptions behind the demonstrations and  found that they would not likely be realized. For example, in considering  whether to apply for a demonstration, Minnesota found a substantial risk  that seniors receiving only a drug benefit would eventually become  Medicaid-eligible over a 5-year follow-up period. In its optimal model, the  study estimated that to generate enough savings to offset the new drug  costs, the risk of Medicaid entry would have to be reduced by 50 percent  for non-nursing-home enrollees and by 30 percent for those who become  eligible after entering a nursing home. Minnesota Medicaid officials  concluded that this scenario was not realistic and dropped the state’s  Pharmacy Plus demonstration proposal.
Pennsylvania also conducted a Pharmacy Plus demonstration feasibility  study for PACE and the related Pharmaceutical Assistance Contract for  the Elderly Needs Enhancement Tier (PACENET) programs, which  together enrolled about 270,000 seniors in 2002. The study found that to  offset drug benefit costs, the programs would need aggressive cost  containment, through such approaches as increased co-payments, reduced  provider reimbursements, and a preferred drug list. In addition, the study  noted that in states with generous drug benefits, savings from expansion  to more seniors are particularly difficult to realize because most  beneficiaries who would have avoided expensive nursing home care have  already done so. As of March 2004, Pennsylvania had not submitted a  Pharmacy Plus demonstration proposal.
section_title: Concerns about Effects on States if Savings Do Not Accrue
paragraphs: Although it is early in demonstration implementation, we and others have  raised concerns about how states may be affected if savings under  Pharmacy Plus do not accrue and the states’ spending reaches or exceeds  HHS’s approved spending limits. We noted in our July 2002 report that the  Illinois Pharmacy Plus demonstration, as approved, makes several risky  assumptions with regard to the extent of the expected savings. In such  cases the federal government would not be at financial risk, but the states  would be, because the spending limits cover services for all the states’  Medicaid seniors. Any expenditures for Medicaid seniors beyond the  demonstration’s federally matched spending limit would be entirely the  state’s responsibility. Officials in Florida and Wisconsin expressed  concerns that their demonstration spending limits, based on fixed rates of  growth projected over 5 years, could not be adjusted to reflect  unpredictable changes in costs and enrollment growth. One study has  raised concerns about the potential effects on Medicaid seniors, noting  that as state spending approaches the limit of what the federal government  will match, states may feel pressed to reduce optional expansions of  eligibility or optional benefits. States could also try to control spending  without reducing eligibility or services by lowering provider  reimbursements—a step already taken in Illinois, although not in response  to pharmacy demonstration enrollment or spending—or by implementing  preferred drug lists.
section_title: States Have Taken Few Steps to Evaluate Demonstrations, and HHS Has Not Ensured Sufficient or Timely Progress Reporting
paragraphs: As of February 2004, efforts by the states and HHS to evaluate and monitor  the four approved demonstrations, and to address some of the research  questions the Pharmacy Plus initiative raises, were in their early stages.  The four states with approved demonstrations had taken few steps toward  implementing the evaluation plans required as a condition of approval, and  an independent evaluation of two of the demonstrations, contracted by  HHS and started in October 2002, was not scheduled to report until  September 2005. In the interim, HHS has not ensured that the states’  required progress reports contain sufficient information for monitoring  whether the demonstrations are functioning as intended or that these  reports are submitted in a timely manner.
subsections: section_title: States Have Taken Few Steps to Implement Evaluation Plans
paragraphs: As a condition of Pharmacy Plus approval, HHS requires states to design  and carry out an evaluation and to report their results after the  demonstration ends. States are required to submit a plan for this  evaluation in their proposals and in the operational protocols that HHS  approves before states begin the demonstrations. Although the four states  with approved Pharmacy Plus demonstrations submitted the required  evaluation plans—containing research hypotheses, possible outcome  measures, and data needs—as of February 2004, they had taken few steps  to put their evaluation plans into practice.
As HHS requires, the four states’ initial proposals and operational  protocols included plans for how they would evaluate whether their  demonstrations were working as intended. With some variations, all the  plans proposed to address the overall research question of how providing  a pharmacy benefit to non-Medicaid-covered seniors would affect  Medicaid costs, service use, and future eligibility trends, including whether  savings achieved by diverting individuals from Medicaid eligibility would  offset the benefit’s cost. The first demonstration proposal, from Illinois,  initially contained an extensive plan to assess demonstration outcomes;  the plan later changed significantly. The initial plan proposed that the state  collect data from sources such as Medicaid and Medicare claims systems,  surveys of participants or case-study interviews, and demonstration- specific claims. In terms of outcome measures, Illinois’ plan proposed  comparing seniors who do have the drug benefit with seniors who do not  on such measures as hospitalization rates, health care service costs, use of  emergency room services, and rates and length of nursing home stays. A  later version of Illinois’ plan (as described in the state’s operational  protocol), however, calls for using existing Medicaid claims data for only  one outcome measure, Medicaid spending for seniors.
Both South Carolina and Wisconsin adopted Illinois’ relatively extensive  initial evaluation plan in their demonstration proposals, and as of February  2004, neither South Carolina nor Wisconsin had changed its proposed  plan. Florida, which did not submit an evaluation plan in its demonstration  proposal, provided a two-paragraph discussion in its operational protocol.  This discussion listed several hypotheses and indicators to be monitored,  noted that data would be collected using the state’s current Medicaid  system, and gave no details about how or when the plan would be  implemented.
As of February 2004, the states had taken few steps to implement their  demonstration evaluation plans or to determine how they would collect or  analyze data to support their evaluations. States’ evaluation activities were  generally limited to collecting and reporting to HHS data from their  existing Medicaid data systems. Although plans for Illinois, South  Carolina, and Wisconsin call for starting their evaluations at the start of  their demonstrations to draw on data about services used before and   throughout beneficiaries’ enrollment, these states and Florida indicated  they were just beginning to collect and report data to implement their  evaluation plans:    Florida and South Carolina officials told us that they had not decided  whether their evaluations would be designed and conducted by the state  Medicaid agency or by an outside entity such as a university. Neither state  had developed an evaluation implementation schedule.
Illinois and Wisconsin reported providing extensive state data for HHS’s  independent evaluation of their demonstrations but, at the time of our  review, had not begun their own evaluations. State officials told us they  understood that participating in the independent evaluation would exempt  them from conducting their own evaluations. But HHS officials told us that  state evaluations were still required.
section_title: HHS Has Contracted for an Independent Pharmacy Plus Evaluation
paragraphs: HHS has contracted with independent university researchers for an  extensive evaluation of the Pharmacy Plus demonstrations in Illinois and  Wisconsin. The evaluation’s goal is to document achievements and  difficulties in implementing a Pharmacy Plus demonstration, as well as to  identify impacts on entry into Medicaid and on costs to Medicare.  According to HHS, the evaluation aims to address whether providing  prescription drug benefits to non-Medicaid seniors will keep individuals  relatively healthy, divert them from full Medicaid eligibility, and thus lower  Medicaid and Medicare costs. To address these issues, the evaluation  contract calls for four components of work, including (1) site visits to  Illinois and Wisconsin to describe the demonstrations and their  implementation; (2) telephone surveys of demonstration beneficiaries in  those states about their health status, access to health care, and prior drug  coverage; (3) analysis of Medicaid, Medicare, and demonstration claims  data to assess patterns of drug use and effects on Medicaid and Medicare  costs; and (4) an analysis of enrollment trends in each state’s Medicaid  program to determine if diversion assumptions are met. In addition, the  evaluation aims to compare the experiences of demonstration  beneficiaries with a similar population in another state that does not offer  a prescription drug benefit.
Final results for all components of this planned 3-year evaluation, which  began in October 2002, are scheduled to be reported to HHS by September  2005. Specifically, a final report to HHS on the patterns of drug use is due  in September 2004; final reports on the demonstrations’ cost effects on  Medicaid and Medicare are due in September 2005. The evaluation  contract does not indicate when results from the work may be available to  other researchers or the public.
According to the HHS evaluation project officer, the independent  evaluators completed state site visits to Illinois and Wisconsin in July 2003  for the descriptive work component and submitted draft reports to HHS in  December. These reports were in review as of March 2004, and the  project officer expected them to be approved and posted on HHS’s Web  site, although he did not know when posting would occur. A report  containing results from the second evaluation component, the telephone  surveys of beneficiaries, was expected later in 2004.
section_title: HHS Has Not Ensured That States Meet Progress- Reporting Requirements
paragraphs: HHS’s monitoring and reporting requirements, which the states agree to  carry out under HHS oversight, are set forth in the terms and conditions  attached to each demonstration’s approval letter. Although HHS and the  states participated in required telephone conference calls to monitor the  demonstrations’ start-up, HHS has not ensured that all states submit the  required quarterly and annual progress reports. The lack of sufficient and  timely information from progress reports may impair the department’s  ability to monitor demonstration operations and accomplishments.
Monitoring and reporting requirements are not as clearly established for  the Pharmacy Plus initiative as for the Health Insurance Flexibility and  Accountability (HIFA) initiative:    The HIFA and Pharmacy Plus initiatives both require states to participate  with HHS in monthly telephone monitoring calls. For pharmacy  demonstrations, however, monthly calls are required for 6 months after  implementation and only as needed thereafter; for most approved HIFA  demonstrations, monthly calls are unlimited.
States with approved HIFA demonstrations are required to submit  quarterly progress reports in a format agreed upon with HHS, and  demonstration terms and conditions describe the required content of these  reports. The terms and conditions for Pharmacy Plus demonstrations are  less specific regarding progress report format and content.
HIFA demonstrations are expected to submit separate annual reports that  discuss progress in evaluating the demonstrations, including results of  data collection and analysis to test research hypotheses. Pharmacy Plus  annual reports, in contrast, may be combined with or include the fourth  quarterly progress report, may follow the same broad content guidelines  as quarterly reports, and are not required to report progress in evaluation.
As of March 2004, HHS and the four Pharmacy Plus states had participated  in the initial monitoring phone calls and begun to gather data on how their  demonstrations were working. HHS and the states confirmed participating  in monthly telephone calls for the first 6 months and then agreeing to  maintain contact as needed. An HHS official told us the department did  not set agendas or document these informal contacts, which focused on  demonstration operations as states tracked enrollment and began to  gather information about drug use and expenditures for new beneficiaries.  States reported taking some steps to develop the capacity to report on  their demonstrations. Florida, Illinois, and Wisconsin, for example,  reported having or developing data management systems containing state  Medicaid and other data that are capable of generating demonstration- specific reports. South Carolina expected to rely on existing Medicaid data  systems. None of the states, however, were tracking the number of  demonstration enrollees who had become eligible for Medicaid, although  officials in three states reported the ability to do so. Further, the states had  not provided information to HHS to assess whether diversion savings were  occurring.
The information that HHS requires states to report has been insufficient  for determining whether the demonstrations are operating as intended.  According to one HHS official, HHS has not prescribed a standard format  for, or specific information to be provided in, either the quarterly or  annual progress reports; rather, the department works with the states to  obtain needed information. The Pharmacy Plus terms and conditions  stipulate that written quarterly and annual progress reports contain, at  minimum, (1) a discussion of events during the quarter, including  “enrollment numbers, lessons learned, and a summary of expenditures”;  (2) notable accomplishments; and (3) problems and questions that arose  and how they were resolved. The same HHS official told us that in  response to these general requirements, states’ progress reports did not  always include all information considered useful for monitoring purposes.  For example, HHS reported that officials were working with Illinois to  obtain additional information to complete its draft annual progress report.  Illinois’ six-page annual report, submitted in September 2003, reported  only on new demonstration beneficiaries and did not include first-year  starting or ending enrollment or cost information for the state’s Medicaid  senior program as a whole—the services and population affected by the  Pharmacy Plus spending limit. One HHS official told us that after review of  Illinois’ report, these cost and enrollment data were specifically requested  to assess whether the new drug benefit was keeping seniors from  becoming eligible for full Medicaid benefits. As of February 2004, Illinois  had not provided this information.
Finally, HHS has not insisted on timely submission of the required  quarterly and annual reports. Although Pharmacy Plus terms and  conditions specify that quarterly reports are due 60 days after the end of  the quarter, and annual reports are due 60 days after the end of the fourth  quarter, HHS has not ensured that states submit the reports on time.  Again, the department’s policy is to work with the states toward  compliance. As of January 2004, Florida and Wisconsin had submitted all  required written quarterly reports, mostly on time, while South Carolina  had submitted only one of three required progress reports. Illinois, whose  demonstration was the first to be implemented, did not submit any of the  three required quarterly reports before submitting its combined fourth  quarterly and first annual report early in September 2003.
section_title: Conclusions
paragraphs: HHS’s approval and monitoring of state demonstrations under the  Pharmacy Plus initiative raise cost and oversight concerns and, ultimately,  program concerns. The department’s approval of four states’  demonstrations raises questions about HHS’s basis for its decisions.  Because HHS based the spending limits it approved on higher-than- justified growth rates, these spending limits do not, in our view, represent  reasonable estimates of demonstration costs over the 5-year trial periods  and are not budget neutral. It was difficult to assess the reasonableness of  the spending limits themselves, given that they were decided upon through  an undocumented negotiation process, and neither public nor HHS  internal documents stated the rationale for approving higher growth rates.  We found that if HHS’s benchmarks had been used to establish the  spending limits, the federal government’s liability for the four  demonstrations could have been $1.6 billion lower over 5 years. Moreover,  the approved demonstrations rely on highly questionable assumptions  about the extent to which savings would accrue to Medicaid from  improved health of people receiving the new pharmacy benefit,  particularly since many of them already had pharmacy benefits through  existing state-funded programs.
In addition, the Pharmacy Plus initiative raises important evaluation  questions about how improved access to prescription drugs may affect  seniors’ health and Medicaid and Medicare costs. Although some of these  questions will likely be addressed by the independent evaluation of two  states’ demonstrations, in the interim HHS does not appear to be ensuring  that states provide sufficient, consistent, and timely information for  demonstration monitoring or that states begin implementing their own  evaluation plans. The limited available information on how these  demonstrations are operating makes it difficult to assess whether they are  operating as intended.
The concerns about HHS’s approved Pharmacy Plus demonstrations  parallel those we have raised about other section 1115 waiver  demonstration approvals over the past decade. These include the extent to  which the department is protecting the Medicaid program’s fiscal integrity  and the need for clear criteria and a public process when HHS reviews and  approves demonstrations. Along with the authority to waive Medicaid  requirements, and the flexibility given states to test new approaches for  delivering services more efficiently and effectively, comes the  responsibility for making decisions based on clear criteria and for  monitoring the demonstrations and learning from them. More can and  should be done to fulfill this responsibility.
section_title: Recommendations for Executive Action
paragraphs: In light of our findings that the four HHS-approved Pharmacy Plus  demonstrations are likely to substantially increase federal Medicaid  spending, as previously approved Medicaid section 1115 demonstrations  have done; that HHS’s review process and basis for these approvals have  not been clearly set forth; and that approved demonstrations are not all  meeting evaluation and monitoring requirements, we are making seven  recommendations to the Secretary of HHS related to the section 1115  demonstration process.
To improve HHS’s process for reviewing and approving states’ budget  neutrality proposals for Pharmacy Plus and other Medicaid section 1115  demonstrations, we recommend that the Secretary take three actions:    For future demonstrations, clarify criteria for reviewing and approving  states’ proposed spending limits.
Consider applying these criteria to the four approved Pharmacy Plus  demonstrations and reconsider the approval decisions, as appropriate.
Document and make public the basis for any section 1115 demonstration  approvals, including the basis for the cost and enrollment growth rates  used to arrive at the spending limits.
To ensure that approved Pharmacy Plus and other Medicaid section 1115  demonstrations fulfill the objectives stated in their evaluation plans, we  recommend that the Secretary take two actions:    Ensure that states are taking appropriate steps to develop evaluation  designs and to implement them by collecting and reporting the specific  information needed for a full evaluation of the demonstration objectives.
On acceptance, make public the interim and final results of HHS’s  independent Pharmacy Plus evaluation.
To ensure that the Secretary and other stakeholders have the information  needed to monitor approved Pharmacy Plus and other Medicaid section  1115 demonstrations to determine if they are functioning as intended, we  recommend that the Secretary take two actions:    Ensure that states provide sufficient information in their demonstration  progress reports, in a consistent format, to facilitate the department’s  monitoring.
Ensure that states submit required demonstration progress reports in a  timely manner.
section_title: Agency and State Comments and Our Evaluation
paragraphs: We provided a draft of this report for comment to HHS and the states of  Florida, Illinois, South Carolina, and Wisconsin. HHS and Florida, Illinois,  and Wisconsin responded with written comments, which are reproduced  in appendixes III through VI, respectively. South Carolina provided  technical comments, which we incorporated in our report as appropriate.
subsections: section_title: HHS’s Comments and Our Evaluation
paragraphs: HHS concurred with five of our recommendations to strengthen the  processes for approving and overseeing Pharmacy Plus and other  Medicaid section 1115 waivers and disagreed with two. It concurred with  our recommendations to make public the basis for section 1115  demonstration approvals and to ensure that Pharmacy Plus and other  Medicaid section 1115 demonstrations fulfill the objectives of their  evaluation plans by working with the states toward useful program  evaluations and making results of the independent Pharmacy Plus  evaluation publicly available. HHS also concurred with our  recommendation to ensure that adequate information is available to  monitor the demonstrations to determine if they are functioning as  intended. In this regard, HHS stated that it has provided each state that has  implemented a Pharmacy Plus demonstration with an example of an  outline and content to be used as a guide for progress reports and that it  will make concerted efforts to ensure that states submit the reports in a  timely manner.
HHS did not concur with our recommendation that the Secretary of HHS  clarify criteria for reviewing and approving states’ proposed  demonstration spending limits, indicating that although the department  recognizes the importance of using criteria for reviewing budget  neutrality, strict criteria cannot be determined in advance because states’  circumstances differ. HHS also strongly disagreed with our  recommendation that the Secretary consider applying clarified criteria to  the four approved Pharmacy Plus demonstrations and reconsider the  approval decisions as appropriate. HHS stated that it used criteria to  review each of the approved, disapproved, and pending demonstration  proposals; believes the four approved demonstrations were based on well- supported budget estimates of future state spending; and does not believe  it appropriate to reconsider approved demonstrations before the end of  the approval periods.
We agree with HHS that some flexibility is appropriate in considering the  unique Medicaid section 1115 demonstrations proposed by different states.  Consistent with our analyses of other section 1115 demonstration waivers  over the past decade, however, we believe HHS’s review process and  decision criteria should be clear, and the results—particularly when  approved spending limits deviate significantly from limits developed using  benchmarks that HHS said it uses as a starting point—should be publicly  explained and documented in the demonstrations’ approval letters and  terms and conditions. Even though HHS has developed a standard  application form for Pharmacy Plus demonstrations, that form and other  guidance does not provide written criteria for how HHS reviews and  approves the growth rates that states propose. HHS’s rationale for  significantly deviating from benchmarks for projecting future program  growth in establishing different states’ spending limits has not been  documented or made clear to us or to others, including other states that  may be seeking approval of demonstration proposals. Without such clarity,  questions arise as to how consistently states have been or will be treated  in applying for demonstrations. Further, in our view, Pharmacy Plus  demonstration approvals were based on questionable savings  assumptions. We believe that HHS should establish clear criteria on which  to base the spending limits and should reconsider its spending limit  decisions for the approved Pharmacy Plus demonstrations in light of such  criteria.
HHS also commented that it was premature to evaluate the Pharmacy Plus  demonstrations given the limited experience from 12 to 18 months of  operation. HHS said that were the outcome predetermined, a  demonstration would serve no purpose. The agency believes the Pharmacy  Plus initiative provides states an opportunity to use a Medicaid  demonstration to test if providing drug coverage will prevent the aged and  disabled low-income population from becoming Medicaid eligible. HHS  noted that the four approved demonstrations together are providing drug  coverage to 346,000 seniors who would otherwise be without this  important benefit.
We agree that it is too early to evaluate the outcomes of the 5-year  demonstrations and that section 1115 demonstrations are intended to test  new propositions. More needs to be done, however, to ensure that states’  evaluations collect the information needed to determine whether those  new propositions are functioning as intended. Four states have Pharmacy  Plus demonstrations in place to test such propositions, and substantial  federal funding is involved, including costs that were previously paid for  by the states themselves. For these reasons, HHS has a responsibility to  (1) make fiscally prudent decisions in its approvals, (2) ensure that savings  hypotheses have some grounding in experience or research, and   (3) ensure that the evaluations are planned and conducted in a way that  will produce adequate information regarding the demonstrations’ research  hypotheses.
We also agree that the demonstrations can provide a valuable benefit to  low-income seniors and disabled individuals who might otherwise be  without drug coverage. But three of the four states with approved  demonstrations had state-funded drug coverage programs in place before  implementing their Pharmacy Plus demonstrations, and these state-funded  programs became eligible for federal matching funds when the  demonstrations were approved. We therefore find HHS’s statement that  the demonstrations are providing drug coverage to seniors who would  otherwise be without it to be an overstatement.
HHS also commented on how MMA may affect the operation of approved  Pharmacy Plus demonstrations and the review of pending and new  demonstration proposals. HHS stated that seniors covered by the four  Pharmacy Plus demonstrations will be able to begin receiving drug  coverage under the Medicare Part D program in January 2006, and states  will be able to use their own funds to “wrap around” the Medicare benefit  to assist other Medicare beneficiaries whose incomes exceed the level for  low-income subsidies. At that time, HHS believes there will be less need  for Pharmacy Plus demonstrations, given expanded Medicare coverage for  prescription drugs, and states operating the demonstrations will need to  decide if they want to continue doing so and if their demonstrations can  continue to be budget neutral. We have reviewed and incorporated this  new information as appropriate.
HHS’s written comments appear in appendix III, along with our response  to additional comments that HHS provided on the findings in our draft  report. The department also provided technical comments, which we  considered and incorporated as appropriate.
section_title: Illinois’ and Wisconsin’s Comments and Our Evaluation
paragraphs: Illinois and Wisconsin officials commented that our draft report overstated  the demonstrations’ financial risk to the federal government and was  unnecessarily alarming in light of data showing that the demonstrations  are operating well within their spending limits. In its comments, Illinois  said that it stood by the growth rates it used to develop the spending limit  for its Pharmacy Plus demonstration; it further argued for the soundness  of its demonstration’s premise—that providing a drug benefit to seniors  will keep them healthier than if they had no drug coverage. In its  comments, Wisconsin said that the draft report failed to consider the  significant benefits its demonstration offers to the federal government and  to seniors.
We agree that providing a drug benefit to seniors could keep them  healthier, and we do not dispute the benefit to seniors of the states’ drug  programs started or expanded through Pharmacy Plus demonstrations.  The demonstrations were approved, however, on the presumption that the  cost of each state’s prescription drug program would be paid for in savings  from keeping seniors with little or no previous drug coverage healthy  enough that they would not become eligible for full Medicaid benefits.  Illinois’ demonstration was approved on this presumption even though  most of the beneficiaries were already receiving some prescription drug  coverage through the state’s existing state-funded program. We remain  concerned that HHS is not maintaining its policy to ensure demonstrations  are budget neutral.
Illinois also commented that it had taken all necessary steps to conduct its  own evaluation and that it had cooperated fully with federal evaluators  and HHS officials. Illinois said that although it officially filed its quarterly  reports late, it submitted all the detailed data contained in those reports to  CMS monthly. We are principally concerned with the extent to which the  information that Illinois provided could be used to monitor whether the  demonstration was operating as intended. Its one- to two-page quarterly  reports, filed late, tallied the number of beneficiaries enrolled in the  demonstration and drug expenditures to date and provided a narrative  paragraph on accomplishments, problems, or issues. The information  itself, however, furnishes little insight as to whether the demonstration is  operating as intended or whether the benefit is reducing Medicaid costs.
Wisconsin commented that the draft report failed to ascribe any value to  the government of Wisconsin’s agreement to cap its federal Medicaid  funding for seniors as a condition of Pharmacy Plus demonstration  approval. We believe the draft report accurately captured HHS’s approach  to limiting the federal liability for the Pharmacy Plus demonstrations by  establishing a “cap,” or spending limit, as a condition of approval. We  remain neutral on the “value” of this cap for several reasons. Requiring  states to abide by a spending limit is a departure from the open-ended  entitlement nature of the Medicaid program. We also recognize that under  the Medicaid program, states have considerable discretion to alter  spending by increasing—or decreasing—coverage for certain populations  and services. In addition, we recognize that HHS’s budget neutrality  practices provide for flexibility in approach and that HHS has established  such a limit on other section 1115 demonstrations before the Pharmacy  Plus initiative.
Wisconsin also commented that the draft report failed to mention that the  demonstrations were reviewed, determined reasonable, and approved by  OMB. We recognize that OMB is involved in assessing budget neutrality  and other aspects of Pharmacy Plus and mentioned that agency’s role in  our draft report. Nevertheless, as OMB officials told us, the authority for  section 1115 waiver approval rests with the Secretary of HHS, and  responsibility for final Pharmacy Plus approval decisions rests with the  Secretary and his designees.
Wisconsin further commented that in criticizing CMS for not obtaining  better evidence to support projected savings, our report fails to consider  that the reason for demonstration projects is precisely to test such  propositions. We maintain, however, that when HHS establishes a new  initiative to encourage states to apply for Pharmacy Plus demonstrations,  it is the agency’s responsibility to ensure that each demonstration’s  evaluation objectives are reasonable, each demonstration’s savings  assumptions are realistic and grounded in some evidence, and the  evaluations are well planned and data monitoring is established early  enough to assure that the questions can be answered.
section_title: Other States’ Comments and Our Evaluation
paragraphs: Florida commented that its demonstration was predicated upon savings to  be achieved over the 5-year life of the program and that its proposed  spending limit was close to—less than 1 percent above—the conservative  benchmark spending level we calculated. We agree that Florida’s spending  limit was relatively close to a limit based on the benchmarks and included  that information in the draft report.
South Carolina provided technical comments that we incorporated as  appropriate.
As arranged with your offices, unless you release its contents earlier, we  plan no further distribution of this report until 30 days after its date. At  that time, we will send copies of this report to the Secretary of Health and  Human Services, the Administrator of the Centers for Medicare &  Medicaid Services, and others who are interested. We will also make  copies available to others upon request. In addition, the report will be  available at no charge on the GAO Web site at http://www.gao.gov.
If you or your staff have any questions, please contact me at (202) 512- 7118. Another contact and other major contributors are listed in   appendix VII.
section_title: Appendix I: Calculating a State’s Pharmacy Plus Spending Limit for All Medicaid Seniors
paragraphs: To achieve budget neutrality, a state’s projected 5-year spending with its  Pharmacy Plus demonstration cannot exceed 5-year projected costs  without the demonstration. As a result, the projected costs of a state’s  existing Medicaid program for seniors effectively sets the spending limit  while the demonstration is under way. Calculating this without- demonstration limit (steps 1–5 in fig. 1) starts with a base year, generally  the most recent full year for which data are available; calculations for each  subsequent year are based on numbers from the previous year. The result  limits a state’s Medicaid spending for all services provided to all Medicaid  seniors in the state.
Calculating projected 5-year with-demonstration costs follows the same  steps but, in addition, factors in the estimated number of new beneficiaries  receiving only the prescription drug benefit; the costs of providing them  the benefit; and the expected savings, mainly from keeping these  beneficiaries healthy enough to avoid eligibility for full Medicaid.
section_title: Appendix II: Denied, Withdrawn, and Pending Pharmacy Plus Demonstration Proposals as of May 2004
paragraphs: Appendix II: Denied, Withdrawn, and Pending  Pharmacy Plus Demonstration Proposals as of  May 2004  Projected enrollment: Individuals with incomes at or below 300 percent of the federal  poverty level (FPL).
Coverage and cost sharing: Sought federal assistance only for administrative costs for  a demonstration to make prescription drugs available at the discounted Medicaid rate  plus a dispensing fee. State was to contribute $1 toward the cost of each prescription in  the first year, increasing to $8 by the fifth year.
Reasons for denial: Exceeded the Pharmacy Plus income limit at or below 200 percent  of FPL, provided for only minimal state financial contributions to pharmacists, and did not  include the necessary budget neutrality analysis.
Projected enrollment: Seniors and adults with disabilities with incomes at or below   200 percent of FPL or, if income is above 200 percent of FPL, with prescription drug  expenses exceeding 40 percent of their incomes.
Coverage and cost sharing: All prescriptions covered by the Medicaid state plan, up to  an annual benefit limit of $2,500. Participants to pay co-payments of $5 or 25 percent of  the cost per prescription, whichever is greater.
Reason for denial: State already provided drug benefits to the people to be covered  under the demonstration.
Projected enrollment: Seniors with incomes at or below 188 percent of FPL.
Coverage and cost sharing: Same broad prescription drug coverage as state Medicaid  plan. State proposed three levels of co-payments (exact amounts not specified): generic  drugs, designated brand-name drugs, and all other brand-name drugs. Full cost of  prescriptions to be covered after participants reached annual out-of-pocket spending  limits: for example, a single person would pay the lesser of $2,000 or 10 percent of gross  annual income.
Reason for withdrawal: State’s existing pharmacy assistance program for seniors  already covered the populations to be included in the demonstration, and without an  expansion the state and the Department of Health and Human Services (HHS) could not  reach agreement on budget neutrality.
Projected enrollment: Seniors and adults with disabilities with incomes up to 300  percent of FPL.
Coverage and cost sharing: All prescription drugs and insulin and syringes with  specified exceptions, such as cosmetics and antihistamines. Annual registration fee of  $25 and co-payments of $12 for those with incomes up to approximately 233 percent of  FPL and $20 for those above.
State program: Covers low-income seniors and people with disabilities with incomes up  to approximately 233 percent of FPL. Demonstration would expand eligibility up to 300  percent of FPL.
Projected enrollment: Seniors and adults with disabilities with incomes at or below   200 percent of FPL.
Coverage and cost sharing: All prescription drugs covered by state Medicaid plan, with  $5 co-payment for each prescription. For brand-name drug when generic is available, $5  co-payment plus cost difference between the two.
State program: Covers seniors and adults with disabilities with incomes up to 222  percent of FPL if single and 202 percent if married. Demonstration would cover  individuals with incomes at or below 200 percent of FPL.
Projected enrollment: Qualified Medicare beneficiaries age 65 or older with incomes at  or below 85 percent of FPL.
Coverage and cost sharing: Would cover two prescriptions per beneficiary per month.  Annual $25 enrollment fee and co-payments of $10 for each generic prescription and  $20 for each brand-name drug.
State program: No state-funded pharmacy assistance program for seniors at the time of  demonstration proposal submission.
Projected enrollment: Seniors with incomes at or below 135 percent of FPL.
Coverage and cost sharing: Same prescription drugs as the state’s Medicaid program,  plus insulin, up to annual benefit caps set on a sliding scale: $1,000 for people with  incomes up to 100 percent of FPL; $750 for those with incomes up to 120 percent of  FPL; and $500 for those with incomes at or below 135 percent of FPL. Participants  would pay 50 percent of the discounted program price, which is the same as the  Medicaid price, for each prescription.
State program: Existing state-funded pharmacy program for low-income seniors to be  covered under the demonstration with no change in eligibility or drug coverage. State  indicated that increased enrollment was expected in the demonstration following a  change from a mail-in rebate system to a point-of-sale system using a discount card.
Projected enrollment: Seniors age 62 or older and adults with disabilities with incomes  at or below 185 percent of FPL.
Coverage and cost sharing: Prescription drugs for specified conditions with 20 percent  co-payment for each prescription, or 10 percent if from mail-order sources. Broader  range of drugs available for coverage with 20 percent co-payment after $1,000 out-of- pocket expenses.
State program: Demonstration would cover state-funded pharmacy program, expand  conditions covered, and add voluntary mail-order purchase.
Projected enrollment: Seniors and adults with disabilities or chronic illness, including  chronic mental illness, with incomes at or below 200 percent of FPL.
Coverage and cost sharing: All prescription drugs covered by state Medicaid plan.  Annual $25 enrollment fee (waived for first year of program) and co-payments that  increase after participants have incurred $1,800 of drug expenses per year under the  program, from $2 to $4 for generics and from $8 to $12 for brand-name drugs with no  generic equivalent; other brand-name drugs have a $25 co-payment.
State program: The demonstration would cover individuals with incomes at or below   200 percent of FPL from three state-funded pharmacy programs, while individuals in  those programs with higher incomes would continue to be state funded. The scope of  drugs covered by state programs would be expanded under the demonstration.
Projected enrollment: Seniors with incomes at or below 200 percent of FPL.
Coverage and cost sharing: All prescription drugs and insulin. Co-payments of $5 for  generic and $15 for brand-name drugs; annual benefit limit of $1,000 per participant.
State program: Demonstration would cover and expand existing state-funded program  by broadening prescription drugs covered from drugs for three specific conditions to  those for all conditions, reducing cost sharing, and increasing annual benefit limit from  $600 to $1,000.
Projected enrollment: Seniors with incomes at or below 200 percent of FPL.
Coverage and cost sharing: Most prescription drugs covered by state Medicaid plan,  plus insulin and syringes. Annual $25 enrollment fee and coinsurance of 20 percent of  cost of each prescription up to a monthly cap on a sliding scale determined by household  income. An additional co-payment would be charged for brand-name drugs with generic  equivalents.
State program: Demonstration would cover existing state-funded pharmacy assistance  program with the same eligibility and coverage and expand enrollment.
In March 2003, Massachusetts withdrew two separate section 1115 demonstration proposals from  review: a Pharmacy Plus demonstration for seniors (the proposal described in this appendix) and a  prescription drug benefit for individuals with disabilities as an amendment to the state’s section 1115  Medicaid managed care demonstration. At the same time, Massachusetts submitted a new  proposal—not a Pharmacy Plus proposal—to add a drug benefit for certain seniors and disabled  individuals as an amendment to its existing managed care demonstration. In August 2003, that  proposal was also withdrawn.
section_title: Appendix III: Comments from the Department of Health and Human Services
subsections: section_title: GAO’s Response to the Department of Health and Human Services’ Specific Comments on GAO’s Findings
paragraphs: In addition to indicating whether it concurred with our seven  recommendations, HHS commented on the report draft’s findings in three  areas.
subsections: section_title: Effect of HHS-Approved Pharmacy Plus Demonstrations on Federal Medicaid Spending
paragraphs: HHS disagreed with our conclusion that the four approved Pharmacy Plus  demonstrations will not prove to be budget neutral to the Medicaid  program and will possibly result in increased federal Medicaid spending.  HHS stated that the department takes seriously its responsibility to ensure  budget neutrality in the Medicaid demonstrations it approves, noting that  it approved four Pharmacy Plus demonstrations while denying two and  reviewing but not approving nine other proposals whose budget estimates  were not well supported.
HHS was concerned that we missed the fundamental purpose of budget  neutrality, which HHS says is not to hold states to a formula-driven cap but  to estimate the amount of future Medicaid spending. HHS believes that the  four approved demonstrations’ spending limits were based on well- supported budget estimates of future state spending,1 and said its policy  has never been to hold states to benchmark levels of growth. Those  benchmarks are, in HHS’s view, a starting point in projecting how the  program will grow, because HHS typically permits states to present  rationales for higher growth rates.
HHS also stated that the 0.7 percent per year state historical average enrollment growth  rate we cite for South Carolina (table 2) is in error, because its records showed that South  Carolina’s historical average for enrollment growth was 1.0 percent. In verifying the state’s  historical enrollment rate, we noted that the rate had been “rounded up” to the next full  percentage from the 0.7 percent actual historical rate. For consistency with other rates in  the table, we did not round it. officials and requested all documents that were considered in their budget  neutrality negotiations. Those interviews and documents, which we  discussed in the draft report, did not fully support the higher growth rates  that were approved. We note that enrollment growth rates, in particular,  can have a significant multiplier effect on future spending estimates.  Further, we note that HHS allowed at least one state to argue for a higher  growth rate using broad justifications—such as the effect of the Social  Security Administration’s nationwide outreach program for low-income  Medicare beneficiaries—that other states could also have used but did not,  raising questions of clarity and consistency in both the process and the  final decisions.
Documentation of HHS’s approval decisions and the basis for approved  spending limits could provide a rationale for higher cost and enrollment  growth rates and offer guidance and assurance of consistent treatment to  other states applying for Pharmacy Plus demonstrations. Absent such  documentation, neither HHS nor the states have adequately justified the  departures from states’ historical growth rates or the CMS Actuary’s  growth projections in establishing states’ spending limits.
section_title: HHS’s Review Process and Basis for Approvals
paragraphs: In its comments, HHS stated that the federal review process for Pharmacy  Plus demonstration proposals is similar to the review process for other  Medicaid section 1115 demonstrations, indicating that the process is  necessarily interactive and involves numerous meetings within the federal  team and with states. We acknowledge that the review process for  Medicaid section 1115 demonstration proposals benefits from being  inclusive and interactive, and we are not suggesting that HHS should  establish a new or different review process specifically for the Pharmacy  Plus demonstrations. Our concern is that the basis for its decisions and  any agreed-upon spending limit be clear and justified, not only for  Pharmacy Plus demonstrations but for all section 1115 approvals. As noted  in the draft report, the concerns raised by HHS’s approved Pharmacy Plus  demonstrations parallel those we have raised about other section 1115  waiver demonstration approvals over the past decade, including concerns  about the extent to which the department is protecting the Medicaid  program’s fiscal integrity and the need for clear criteria and a public  process in reviewing and approving demonstrations.
section_title: Approved Demonstrations’ Evaluation and Monitoring Requirements
paragraphs: HHS commented that the department plans to continue working with  states toward developing useful program evaluations based on consistent  data collection as well as sufficient, consistent, and timely monitoring  information. HHS also plans to make results of the independent Pharmacy  Plus evaluation available on the CMS Web site. With regard to states’ own  evaluations, HHS emphasized practical limitations, such as constraints on  state financial and staff resources, indicating that while states ideally  would develop evaluation plans before implementing demonstrations, in  practice such plans often change. HHS commented that it obtains  sufficient information for monitoring the demonstrations through  telephone contacts and progress reports that respond to an example  outline the department provided to each demonstration state.
We recognize that state resources are limited, demonstration  implementation tends to be a higher priority than evaluation, and the  independent contractor evaluation of Pharmacy Plus will provide  substantial information. Nonetheless, the lack of action to monitor key  information—such as whether demonstration enrollees are being diverted  from Medicaid—to plan how their evaluations will be conducted, or to  collect data needed for such evaluations suggests a low priority for  ensuring that evaluations can and will be done. HHS needs to ensure that  states provide sufficient, consistent, and timely information for both  demonstration monitoring and for determining whether the  demonstrations are functioning as intended and to ensure that evaluation  plans are put into place.
section_title: Appendix IV: Comments from the State of Florida
section_title: Appendix V: Comments from the State of Illinois
section_title: Appendix VI: Comments from the State of Wisconsin
subsections: section_title: GAO’s Response to the State of Wisconsin’s Specific Comments
paragraphs: In addition to overall comments on our draft report contained in its letter  and discussed in the body of this report, Wisconsin provided 11 specific  comments in an attachment to its letter, which is reproduced on pages 67  through 69. Our responses to Wisconsin’s specific comments are  numbered below to correspond with each of the state’s numbered  comments.  1.  Wisconsin commented that our $416 million figure (the estimated  federal share of the difference between HHS-approved and benchmark  5-year spending limits in table 3) exaggerates the federal fiscal effect,  because the actual costs of the demonstration’s first years have come  in under the projected costs. The state currently projects federal costs  for the new drug benefit under the demonstration totaling $250 million  over 5 years instead of roughly $537 million, which is the federal share  of $919 million approved for the new benefit (see table 1). Although we  recognize that the actual costs of Wisconsin’s demonstration to date  are less than the costs projected at the time the waiver was approved,  our analysis examined the extent to which HHS ensured that the  demonstrations—in the form they were approved—maintained  spending limits that were budget neutral to the federal government.  Because Wisconsin’s approved spending limit represents the total  amount the state is authorized to spend over the demonstration’s 5- year life-span, the federal government could be liable for as much as   $416 million more than what it would have been liable for had HHS  held the state to a spending limit based on benchmark rates (see table  3).  2.  Wisconsin commented that it is unreasonable to hold HHS to applying  the lower of two benchmark growth rates in calculating budget  neutrality: state experience or projections by the Centers for Medicare  & Medicaid Services’ (CMS) Actuary for Medicaid costs. The state also  expressed concern that our analysis did not incorporate factors other  than the benchmarks that affect program growth. We believe that it is  reasonable to expect HHS to use objective benchmark growth rates in  projecting the Medicaid costs on which it bases spending limits and to  document its reasons for deviating from those benchmarks—even if  the department regards them as starting points. Otherwise, the  department’s rationale for setting higher spending limits (based on  higher growth rates) for some states than for others is not apparent to  other states involved in waiver negotiations and reviews. As noted in  the draft report, HHS responded to Wisconsin’s request for higher  growth rates but did not, in our view, adequately document the basis  for approving higher rates. In our own analysis of the spending limits,  we did not include the additional factors that Wisconsin asserted  should raise its spending limits because neither the state nor HHS  provided adequate support to justify doing so.  3.  Wisconsin stated that our interpretation was unreasonably narrow in  not accounting for potential savings accruing to Medicare, as well as to  Medicaid, from expanding prescription drug coverage for seniors. We  considered savings to Medicaid alone because HHS allows states to  include savings only to Medicaid, not Medicare, in determining  whether their Medicaid demonstrations are budget neutral.  4.  Wisconsin commented that because its historical cost growth rate has  been rising, it was appropriate for HHS to calculate the state’s  spending limit using a rate higher than its historical 5-year average. We  believe that whenever HHS allows growth rate projections that exceed  its benchmarks, it should document the basis for this deviation.  5.  Wisconsin mentioned two state programs that it believes will, like the  Social Security Administration’s outreach program for low-income  Medicare beneficiaries, help increase senior enrollment in Wisconsin’s  Medicaid program because they are likely to identify individuals who  qualify for full Medicaid benefits. But the state did not quantify or  provide any data or other evidence to show the potential effects of  these programs or of Social Security Administration outreach. We did  not include these effects in our benchmark analysis for the same  reason we did not include other factors that Wisconsin believed should  raise is spending limit (see our response to comment 2).  6.  Wisconsin noted that we found no firm evidence to support the idea  that expanding drug coverage would produce significant savings in  Medicaid by diverting or delaying Medicaid enrollment. The state  asserts that this criticism ignores the central purpose of these  demonstrations: to determine if an important health care benefit can  be delivered cost effectively. We acknowledge the value of  demonstrations to test health care alternatives, but we believe that the  case for substantial savings to Medicaid due to expanded prescription  drug coverage is not well supported. We also believe that HHS has not  done enough to ensure that states develop and implement  demonstration evaluation designs. Although we do not dispute  Wisconsin’s comment that research suggests coverage of prescription  drugs benefits seniors, we believe that demonstrating the effects of  drug coverage on avoiding Medicaid enrollment is a separate issue.  7.  Wisconsin has interpreted our mention of congressional concern about  the extent to which HHS has ensured that section 1115 demonstration  waivers promote the goals of Medicaid as implying that the state’s  demonstration is not providing critical prescription drugs to a  vulnerable elderly, low-income, uninsured population. We did not  intend to suggest that Wisconsin’s demonstration is not a valuable  benefit to these individuals. We were referring to our earlier work on  section 1115 Medicaid and State Children’s Health Insurance Program  (SCHIP) demonstrations, which, in addition to raising concerns about  HHS’s use of section 1115 waiver authority to approve demonstration  spending limits that were not budget neutral, also found that HHS was  allowing states to use unspent SCHIP funding to cover childless adults,  despite SCHIP’s statutory objective of expanding health coverage to  low-income children.  8.  Wisconsin commented that we mischaracterized the growth rates  approved by HHS for the state’s demonstration as too high. See our  response to comment 2.  9.  Wisconsin objected to our conclusion that the lack of available  information on how these demonstrations are operating compromises  attempts to assess whether they are operating as intended. This  statement does not apply to any one state alone but synthesizes our  findings for the four approved demonstrations taken together. We  acknowledge that Wisconsin has been responsive to HHS’s  requirements for informative and timely progress reports and have  revised our report as appropriate.  10.  Wisconsin stated that its data reporting system allows its staff to  monitor that the demonstration is operating as intended. In the draft  report, we noted that Wisconsin officials reported having the capability  for monitoring. We have not assessed Wisconsin’s monitoring system.  11.  Wisconsin commented on the importance of, and Wisconsin’s full  participation in, CMS’s contracted independent evaluation as an  effective approach to reviewing the agency’s assumptions relating to  budget neutrality and program effectiveness. We believe the draft  report captured the plans for this independent evaluation, as well as  the apparent confusion over each state’s responsibility for conducting  its own evaluation. We have revised our report to reflect that  Wisconsin officials believe the state is not required to conduct an  evaluation, whereas HHS officials told us the state would be required  to do so.
section_title: Appendix VII: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: In addition, Tim Bushfield, Ellen W. Chu, Helen Desaulniers, Behn Kelly,  Suzanne Rubins, Ellen M. Smith, and Stan Stenersen made key  contributions to this report.
section_title: Related GAO Products
paragraphs: 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 Waiver  Projects Raise Concerns. GAO-02-817. Washington, D.C.: July 12, 2002.
Medicare and Medicaid: Implementing State Demonstrations for Dual  Eligibles Has Proven Challenging. GAO/HEHS-00-94. Washington, D.C.:  August 18, 2000.
Medicaid Section 1115 Waivers: Flexible Approach to Approving  Demonstrations Could Increase Federal Costs. GAO/HEHS-96-44.  Washington, D.C.: November 8, 1995.
Medicaid: State Flexibility in Implementing Managed Care Programs  Requires Appropriate Oversight. GAO/T-HEHS-95-206. Washington, D.C.:  July 12, 1995.
Medicaid: Statewide Section 1115 Demonstrations’ Impact on  Eligibility, Service Delivery, and Program Cost. GAO/T-HEHS-95-182.  Washington, D.C.: June 21, 1995.
Medicaid: Spending Pressures Drive States toward Program  Reinvention. GAO/T-HEHS-95-129. Washington, D.C.: April 4, 1995.
Medicaid: Spending Pressures Drive States toward Program  Reinvention. GAO/HEHS-95-122. Washington, D.C.: April 4, 1995.
Medicaid: Experience with State Waivers to Promote Cost Control and  Access to Care. GAO/T-HEHS-95-115. Washington, D.C.: March 23, 1995.