Medicaid and SCHIP: Recent HHS Approvals of Demonstration Waiver Projects Raise Concerns
Published: 2002-07-12T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: States provide health care coverage to about 40 million uninsured, low-income adults and children under two federal-state programs--Medicaid and the State Children's Health Insurance Program (SCHIP). To receive federal funding, states must meet statutory requirements, including providing certain levels of benefits to specified populations. Under section 1115 of the Social Security Act, the Secretary of Health and Human Services (HHS) can waive many of the statutory requirements in the case of experimental, pilot, or demonstration projects likely to promote program objectives. Since August 2001, HHS has approved four of 13 waiver proposals from states to either expand health insurance to uninsured populations or extend pharmacy coverage to low-income seniors, consistent with the new goals. Of the nine proposals still under review, five seek to expand coverage to uninsured populations, while four would provide pharmacy benefits for low-income seniors. GAO has both legal and policy concerns about the extent to which the approved waivers are consistent with the goals and fiscal integrity of Medicaid and SCHIP. The legal concern is that HHS has allowed Arizona to use unspent SCHIP funding to cover adults without children, despite SCHIP's objective of expanding health coverage to low-income children.
section_title: What GAO Found
paragraphs: GAO found that HHS' approval of the waiver to cover childless adults is not consistent with this objective, and it is not authorized. A related policy concern is that HHS used its waiver authority to allow Arizona and California to use SCHIP funds to cover parents of SCHIP and Medicare-eligible children with no regard to cost effectiveness when the statute provides that family coverage may be provided only if it is cost-effective to do so--that is, with no additional costs beyond covering the child. An opportunity for the public to learn about and comment on pending waivers has not been consistently provided in accordance with policy adopted by HHS in 1994. At the federal level, since 1988 HHS has not followed established procedures to publish notification of new and pending section 1115 waiver applications in the Federal Register with a 30-day comment period.

section_title: Letter
paragraphs: States provide health care coverage to about 40 million low-income  uninsured adults and children largely through two federal-state  programs—Medicaid and the State Children’s Health Insurance Program  (SCHIP). Medicaid generally covers low-income families and elderly and  disabled individuals, while SCHIP provides health coverage to children in  families whose incomes, while low, are above Medicaid’s eligibility  requirements. To receive federal funding, which covered on average about  57 percent of Medicaid expenditures and 72 percent of SCHIP  expenditures in 2001, states must meet certain statutory requirements  including providing a certain level of benefits to specified populations.  Under section 1115 of the Social Security Act, the Secretary of Health and  Human Services (HHS) can waive many of the statutory requirements in  the case of experimental, pilot, or demonstration projects that are likely to  promote program objectives. As part of their responsibility to protect the  fiscal integrity of the programs, traditionally, HHS and the Office of  Management and Budget (OMB) have had a policy that all approved  waiver projects be “budget neutral” for the federal government—that is,  the proposed project cannot result in federal expenditures that are higher  than they would have been without the project.
Within the past year, HHS indicated that it would allow states greater  latitude in using section 1115 waivers to modify the Medicaid and SCHIP  programs and would expedite its consideration of state proposals.  Specifically, the department announced two new section 1115 initiatives to  expand health coverage to uninsured populations and to provide  prescription drug coverage to low-income seniors using section 1115  waivers. One initiative, the Health Insurance Flexibility and Accountability  Initiative (HIFA), focuses on proposals for covering more uninsured  people while at the same time not raising program costs. Another  initiative, called Pharmacy Plus, encourages states to expand access to  prescription drug coverage to low-income seniors not eligible for  Medicaid, again while not raising program costs.
The increased emphasis on using section 1115 waivers and these two new  initiatives have raised concerns about whether HHS can both expedite its  approval process and at the same time provide adequate review and  oversight of waiver proposals that could change how, and to whom,  program services are delivered. The expedited reviews have also raised  concerns about the adequacy of the public’s ability to review and comment  on the proposed changes. At your request, we reviewed section 1115  waiver requests involving expanding coverage to the uninsured or  providing seniors drug coverage that HHS has received since the first of  these initiatives was put into effect in August 2001. Specifically, we  examined three questions regarding the section 1115 waiver proposals  submitted and approved in line with HHS’s goals of expanding health  coverage and providing prescription drug benefits to low-income elderly:  1.  What types of waiver proposals have been submitted and approved?  2.  Has HHS ensured that the approved waivers are consistent with the  goals and fiscal integrity of Medicaid and SCHIP?  3.  To what extent has there been opportunity for public input in the  expedited process?
Our work is based on a review and analysis of section 1115 waiver  proposals for new demonstration projects submitted since August 2001  and related to expanding insurance or providing pharmacy coverage in  line with the two new initiatives. We analyzed HHS data on section 1115  waiver proposals for new programs submitted from August 2001 to May  2002, and documented the type, number, and outcome of these proposals.  For the four approved waivers, we reviewed waiver proposals, HHS  decision memorandums and approval letters, approved waiver  applications, waiver terms and conditions, and operational protocols when  available, and documentation of the states’ public process and budget  neutrality justifications. We also discussed these initiatives and waiver  approvals with officials at HHS, the Centers for Medicare and Medicaid  Services (CMS, the agency within HHS with the lead role in receiving and  reviewing the applications), OMB, and relevant state agencies. To obtain  information on the opportunity for public input to the waiver-approval  processes and any related research studies, we also contacted several  health research and advocacy organizations including the Center for  Budget and Policy Priorities, the National Health Law Program, and the  Kaiser Commission on Medicaid and the Uninsured. We examined the  statutory provisions governing the Medicaid and SCHIP programs and the  section 1115 waiver authority, and obtained HHS’s opinion on a legal  question through written correspondence. Finally, we relied upon our past  reports and testimonies on the approval of section 1115 waivers and other  issues. We conducted our work from December 2001 through June 2002 in  accordance with generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: Medicaid and SCHIP are the nation’s largest health-financing programs for  low-income people, accounting for about $232 billion in federal and state  expenditures in 2001 to cover about 40 million people. Medicaid was  established in 1965 under title XIX of the Social Security Act to provide  health care coverage to certain categories of low-income families and aged  and disabled individuals. SCHIP was established in 1997 under title XXI of  the Social Security Act to provide health care coverage to children living in  low-income families whose incomes exceed the eligibility requirements for  Medicaid. Both are federal-state programs whereby, within broad federal  guidelines, states have considerable flexibility in whom and what they  cover.
Medicaid establishes a framework that states must follow in order to  receive federal funding, known as federal matching payments, for a share  of a state’s Medicaid program expenditures. States are required to cover  certain groups of individuals and offer a minimum set of services, such as  physician, hospital, and nursing facility services, as well as early and  periodic screening, diagnostic, and treatment (EPSDT) services for  individuals under the age of 21. States can also receive federal matching  payments to cover additional optional groups of individuals. For example,  while states are required to cover children under age 6 in families with  incomes at or below 133 percent of the federal poverty level (FPL),  children in families above this level may also be covered at a state’s  option. States may also choose to provide optional services—such as  vision and dental services and prescription drugs—but if they do so, they  must provide the same benefits to all covered beneficiaries. At present,  nearly two-thirds of Medicaid expenditures are for optional populations  and services, largely for long-term care services. Medicaid is an open- ended entitlement, meaning the federal government will pay its share of  state expenditures for people covered under a state’s approved Medicaid  plan, and enrollment for those eligible cannot be limited.
Like Medicaid, SCHIP is administered by states under broad federal  guidelines to offer coverage to children in families with incomes up to 200  percent of the FPL who do not qualify for Medicaid. The federal  government pays a higher share of states’ expenditures under SCHIP than  under Medicaid.  SCHIP programs must provide a benefit package that  meets certain standards. In contrast to Medicaid, SCHIP is not an open- ended entitlement. The Congress in 1997 appropriated a fixed amount for  the program—specifically, $40 billion in federal matching funds over 10  years (fiscal years 1998 through 2007) for SCHIP purposes. Annual  allotments are made to states for use over a 3-year period and the  Secretary is required to determine an appropriate procedure for  redistributing the unused SCHIP funds to those states that have already  spent their SCHIP allotments. In certain circumstances states may restrict  enrollment if their allotment of federal funds has been expended, but to  date, SCHIP spending for most states has fallen well below allotment  levels for a variety of reasons. According to the Congressional Research  Service, despite the fact that 42 states began their SCHIP programs in late  1997 or 1998, new programs take time to get off the ground and the  participation rates have been lower than expected.
Section 1115 of the Social Security Act gives the Secretary of HHS broad  authority to (1) allow states to provide services or cover individuals not  normally eligible for Medicaid and SCHIP, and (2) provide federal funds  for services and populations not otherwise eligible for a federal match.  Title XIX governing Medicaid is one of several titles to which section 1115  specifically applies, and the Congress, in establishing SCHIP, extended  section 1115 to SCHIP “in the same manner” as it applies to Medicaid.  According to one report, in 2001 more than 20 percent of total federal  Medicaid spending was governed by section 1115 demonstration terms and  conditions rather than usual Medicaid rules. Past demonstrations have  significantly influenced the development of Medicaid policy, for example,  by allowing states to restrict the enrollment of beneficiaries to managed  care. The first statewide section 1115 waiver was approved for Arizona in  1982, requiring managed care for all beneficiaries and paying health plans  a fixed amount per person to provide all covered services. Other examples  of large-scale changes approved through waivers include programs begun  in Oregon and Tennessee in the early 1990s. Recognizing its fiduciary  obligations, HHS has since the early 1980s required that states justify that  their section 1115 waiver demonstrations will not cost the federal  government more money than the programs would have cost without the  waivers. However, we have previously reported that section 1115  demonstration waivers approved for several states in the mid-1990s were  not budget neutral.
HHS’s HIFA initiative, using the section 1115 authority, gives states  flexibility to increase cost sharing and reduce benefits for some program  beneficiaries in order to help fund coverage for uninsured populations  within existing Medicaid and SCHIP program resources. HIFA allows  states to provide different benefit packages to different groups of people  covered under the waiver. To be considered, proposals must be statewide  and seek to coordinate coverage with private health insurance options for  low-income uninsured individuals. Responding to states’ expressed  concerns about HHS’s prolonged review process for pending waivers, HHS  has promised more expedited reviews and decisions. To facilitate this, as  part of its HIFA initiative HHS has developed a standard template for  states to use in applying for the waivers.
Like HIFA, the Pharmacy Plus initiative uses section 1115 waiver  authority. The Secretary introduced the Pharmacy Plus initiative in  January 2002 to encourage states to provide pharmacy benefits to low- income elderly populations. While HHS has described the initiative in  budget and other documents, it has not published an application template  and policy guidelines.
section_title: HHS Has Approved Four Section 1115 Waivers to Expand Insurance or Drug Coverage
paragraphs: Since HHS announced the HIFA initiative in August 2001, states submitted  13 proposals for section 1115 demonstration waivers designed to respond  to HHS’s goals of covering more low-income uninsured individuals and  expanding pharmacy benefits as of May 1, 2002. Eight of these 13 are  designed to expand coverage for the uninsured, including 6 HIFA  applications and 2 expansions that were not submitted in HIFA format,  that is, using the HIFA template and following all of the HIFA principles.  Five waivers proposed to expand pharmacy benefits, as envisioned by the  Pharmacy Plus initiative. As of May 1, HHS had approved 4 of the  proposals: 2 HIFA waivers for Arizona and California; an expansion  offering primary and preventive care for the uninsured in Utah; and a  pharmacy benefit waiver in Illinois. The remaining proposals were still  under review as of early June 2002.
subsections: section_title: Four Waivers Have Been Approved Quickly to Expand Coverage
paragraphs: HHS has approved four section 1115 demonstration waivers to expand  coverage for the uninsured and pharmacy benefits since August 2001.  Formal review times for three of these four waivers, which averaged just  3-½ months (109 days), ranged from 60 days for the Utah application to  182 days for the Illinois pharmacy demonstration. These review times  compare with roughly 10 months’ review, on average, for approved section  1115 waivers submitted in 2000 or earlier. These average review times do  not include preliminary discussions and reviews of draft proposals and  concept papers that state and federal officials indicated occurred for  varying lengths of time before formal application, depending on the  particular waiver.
The HIFA demonstrations approved for California and Arizona both allow  expansions using unspent SCHIP funds, but the two differ in the  populations to be added. The California waiver will add coverage for  uninsured low-income parents, caretaker relatives, and legal guardians of  children who are enrolled in Medicaid and SCHIP, testing whether  covering these individuals will increase enrollment of eligible children and  improve their continuity of care. The approved Arizona waiver will use  unspent SCHIP funds to cover childless adults as well as parents of  Medicaid and SCHIP children. HHS’s terms and conditions for the  approved Arizona waiver specify that SCHIP children are the first priority  for coverage, then parents of SCHIP- and Medicaid-enrolled children, and  last priority, childless adults. Arizona was, however, allowed to  retroactively cover childless adults effective November 2001, and parental  coverage is not required until October 2002. In response to an objective of  the HIFA initiative, both the Arizona and California waiver approvals  include feasibility studies of whether and how an employer-sponsored  insurance component might be incorporated into the demonstrations.
The Utah waiver will expand coverage to some formerly uninsured adults  for primary care and preventive services, but exclude other services, such  as inpatient hospital and specialist care. In addition to enrollment fees and  cost sharing for services used by this expansion population, the waiver  will be funded by increased cost sharing and limits on some optional  services for certain groups of currently eligible adults, including some with  mandatory eligibility. Among the optional services being limited are  mental health services, vision screening, and physical therapy.
Illinois received approval for the first Pharmacy Plus waiver. The Illinois  Senior Care program will expand pharmacy coverage to low-income  seniors, most of whom participate in an existing state-funded pharmacy  benefits program. The premise as to how the waiver program can be  implemented without committing additional federal resources is that  expanded access to medically necessary drugs will help keep seniors  healthier and avoid medical expenses, including hospitalization and  nursing home placement, that would reduce their incomes to the level of  Medicaid eligibility.
Table 1 presents highlights about the section 1115 waivers approved for  Arizona, California, Utah, and Illinois. (See app. I for further details about  these four waiver programs.)
section_title: Nine Waiver Proposals Are Still under Review
paragraphs: As of June 3, 2002, 9 of the 13 section 1115 waiver proposals to expand  coverage and pharmacy benefits were still under review by HHS (see app.  II for highlights of these proposals). Most were submitted since January  2002. These proposals included pending HIFA applications from Illinois,  Maine, Michigan, and New Mexico. Three of these proposals would use  unspent federal SCHIP funds to expand coverage to various groups,  including children, parents, and in some cases, childless adults. Most of  the HIFA applications require increased cost sharing for the expansion  groups, and one proposal would reduce benefits for an optional eligibility  group. One additional proposal under review from Washington, which was  not submitted in HIFA format, would also expand coverage for uninsured  individuals, including childless adults using unspent SCHIP funds.
Four states—Connecticut, New Jersey, South Carolina, and Wisconsin— had pharmacy benefit waiver proposals under review that were consistent  with the Pharmacy Plus concept. In all cases, pharmacy benefits would be  expanded to low-income seniors who are not currently eligible for  Medicaid, and the states would fold in participants from state-only funded  pharmacy programs.
section_title: HHS Has Not Always Ensured That Approved Waivers Are Consistent With the Goals and Fiscal Integrity of Medicaid and SCHIP
paragraphs: HHS has not, with its recent approvals of waivers under the new flexibility  initiatives, consistently ensured that waivers are in line with program goals  and are budget neutral. Under the first approved HIFA waivers, HHS is  allowing the use of unspent federal SCHIP funding to cover adults,  including adults who have no dependent children. When the Congress  established SCHIP, it required the Secretary to redistribute unspent funds  to states that had exhausted their allotments to use for the program  purposes of covering children. These waivers raise legal and policy  concerns in light of SCHIP’s stated purpose of expanding health coverage  to low-income children. Similarly, HHS did not adequately ensure that the  waivers will be budget neutral. Our review of the documents supporting  the traditional budget neutrality test used in the two states subject to this  requirement—Utah and Illinois—found that HHS’s review process did not  adequately ensure that the costs to the federal government for the  Medicaid program would be no higher under the waivers than they would  have been without the waivers. The approval of the Illinois waiver also  raises questions about the potential financial risk for the state and  implications for covered elderly beneficiaries, and the extent to which  HHS is ensuring that waivers are fiscally sound.
subsections: section_title: Allowing SCHIP Funding for Adults Raises Legal and Policy Concerns
paragraphs: SCHIP is a program created specifically for low-income children. The  program is designed to enable states to initiate and expand health  assistance to low-income, uninsured children in an effective, efficient, and  coordinated manner. In establishing SCHIP, the Congress directed that  funds made available under the program be used only for program  purposes. Further signaling the importance of spending SCHIP funds on  uninsured children, the Congress also provided for the Secretary to  redistribute states’ annual allotments remaining unspent after a 3-year  period of availability to states that have exhausted their SCHIP allotments.  In April 2002, CMS announced that 18 states and territories would receive  $1.6 billion in reallocated funds because they had exhausted their own  allotments. Given the statutory objective of reducing the number of  uninsured children, however, HHS’s approvals of waivers that allow states  to use unspent SCHIP funds on adults raise certain legal and policy  questions about appropriate uses of the SCHIP allotments.
In our view, HHS has not established that its approval of SCHIP funding  for childless adults in Arizona was reasonable and, therefore, authorized.  Arizona plans to use $126 million in unspent federal SCHIP funds for  childless adults. In approving the Arizona waiver, HHS stated that the  Arizona project would demonstrate whether covering single adults and  childless couples will improve the overall health of the community and  reduce overall rates of uninsurance, and asserted that this result would  “promote the objectives of the Act.” However, HHS did not assert that  insuring these childless adults would improve the provision of health  assistance to low-income children. We are not aware of any basis for  suggesting that the use of SCHIP funds to cover childless adults would  promote the objectives of SCHIP. “the language of section 1115 permits approval of demonstration projects based on the  overall purposes of all of the listed Social Security Act programs (rather than segregating  each program). In other words, in approving a Medicaid or SCHIP demonstration, the  Secretary may consider the likelihood of promoting the objectives of the programs  authorized under any of the titles of the Social Security Act listed in section 1115.”
The structure and language of section 1115 do not support HHS’s  interpretation of its authority. Section 1115 identifies the titles of the  Social Security Act for which demonstration projects may be authorized. It  also lists the statutory provisions within each title containing the  requirements or expenditure limitations that may be waived and clearly  indicates that waiver of requirements or expenditure limitations are to  correspond to the associated titles of the Social Security Act. As a result,  we believe that section 1115 requires HHS to justify that a demonstration  project will likely assist in promoting the objectives of the particular title  of the Social Security Act in which the waived program requirements or  expenditure limitations appear.  With respect to programmatic  requirements or expenditure limitations applicable to SCHIP funds,  section 1115 requires HHS to establish that a demonstration project would  promote the objectives of title XXI, which established SCHIP. As stated  above, HHS has not asserted that the use of SCHIP funds to cover childless  adults would promote the statutory objectives of the program, although it  contends that the Arizona waiver, considered in its entirety, does serve  program objectives.
HHS’s interpretation of section 1115 effectively eliminates the distinctions  among the programs authorized under the identified titles of the Social  Security Act and would allow the agency to waive requirements or  authorize otherwise impermissible expenditures under one program to  promote the objectives of any other program. If HHS were to take this  interpretation to an extreme, it could bypass funding limitations and  mechanisms established for individual programs by funding any of the  programs authorized in the identified titles of the Social Security Act with  funds made available for any other title. This interpretation of section 1115  is particularly problematic in the context of SCHIP, given the  congressional direction that allocated funds not spent for program  purposes be redistributed to states that have exhausted their allotment.
Arizona’s use of SCHIP funds for childless adults raises two additional  concerns. First, Arizona had already received approval from HHS to use  Medicaid funds to expand coverage to certain childless adults. As a result  of the waiver, the federal government will now pay about 77 percent of the  costs under the SCHIP matching rate, instead of about 66 percent if this  same population was covered under Medicaid. Second, if Arizona  expends all of its federal SCHIP allotment, it arguably could qualify for  reallocated unspent federal SCHIP funds from other states. It could then  apply these reallocated funds to childless adults.
HHS’s approval of Arizona’s and California’s use of unspent federal SCHIP  funds to cover parents illustrates the changing policy with regard to the  use of waiver authority to allow states to cover adults. In creating SCHIP,  the Congress authorized states to cover the entire family—both the  parents or custodians and their children—if it was cost effective to do so.  The cost-effectiveness test for family coverage specifies that the expense  of covering both adults and children in a family must not exceed the cost  of covering the children. Under these circumstances, achieving cost- effectiveness appears possible only when the cost to SCHIP of covering a  family is subsidized by employer contributions or other state funds. This  stringent cost-effectiveness test clearly showed congressional priority for  covering children over their parents. However, we reported in 1999 that  some states and advocacy groups were seeking increased flexibility to  tailor their SCHIP programs to cover uninsured parents through the use of  section 1115 waiver authority. CMS, then called the Health Care  Financing Administration, had questioned requests for section 1115  waivers to cover parents during the first year of SCHIP’s implementation,  expressing a concern that the SCHIP goal of providing insurance to low- income children should not be circumvented by the waiver process. The  agency had indicated to states that the purpose of section 1115 waivers  was to test innovative approaches and not to waive statutory provisions  that the states found objectionable. In our first report on SCHIP  implementation in 1999, we noted that, as of April 1, 1999, only two states  had been able to demonstrate cost-effectiveness and had received  approval to use SCHIP funds to cover adults in families with children.
Since our earlier report, HHS has changed its policy and no longer requires  that states demonstrate the cost-effectiveness of family coverage in  section 1115 waiver proposals. On July 31, 2000, HHS announced to states  that it would consider section 1115 waivers to use unspent federal SCHIP  funds to cover parents of SCHIP- and Medicaid-eligible children, but was  silent on the application of the cost-effectiveness test. Since this  announcement, four states, in addition to Arizona and California, have  requested and obtained approval for these types of waivers. In our view,  this change raises broad policy questions about the use of section 1115  authority to waive those statutory requirements that states have found  objectionable but that the Congress put in place clearly to demonstrate the  priority of SCHIP to fund insurance coverage for children. It further raises  the issue of which statutory objectives should take precedence—the  Congress’s direction to allow family coverage only if states could  demonstrate its cost-effectiveness, or the Secretary’s authority under  section 1115 to allow states to spend money on individuals other than  children.
section_title: Budget Neutrality Not Ensured in Utah and Illinois Waivers
paragraphs: Our review of the supporting documentation for the Utah and Illinois  waiver approvals found inadequate justification that the waivers would be  budget neutral—that is, the initiatives would result in no more cost to the  federal government than under the existing program. To establish that a  waiver is budget neutral, HHS requires the state to compare estimated  program costs under two scenarios: (1) costs if the existing program was  continued (“without-waiver” costs) and (2) costs with the new waiver  program (“with-waiver” costs). We found that the states’ estimates of  without-waiver costs included inappropriate costs in Utah and  impermissible costs in Illinois. Including these amounts inflated each  state’s estimate and inappropriately increased the amount the federal  government could pay in the absence of the proposed waiver.
Utah’s without-waiver estimate was inflated because it included the  estimated cost of services for a new group of people who were not being  covered under the existing Medicaid program. By including these costs,  the state in effect inflated the without-waiver costs by about $59 million— 10 percent—over the 5-year life of the waiver. Without this amount, Utah’s  waiver would not be budget neutral. The costs for this group were  included based on the “hypothetical population” concept, under which  HHS has previously allowed states to include the costs of populations that  they could have hypothetically covered under Medicaid as an optional  group, but did not actually cover. In 1995, we reported that states were  using this hypothetical argument to justify higher without-waiver costs,  making budget neutrality easier to achieve. We concluded that, because  state officials indicated that cost containment was a primary consideration  in seeking section 1115 waivers, it was questionable that these states  would have added optional eligibility groups to their Medicaid programs  without the waiver. For Utah, however, the use of this methodology goes  beyond our earlier concern because the group in question does not meet  the criteria for designation as a hypothetical population. The group could  not have been covered without a waiver, because it will receive a limited  primary-care-only benefit package that would not be allowed under  Medicaid’s rules for comprehensive coverage. During the review process,  some officials within HHS voiced concerns about allowing the use of this  methodology; however, the waiver was still approved by HHS as a matter  of policy.  Illinois’s without-waiver estimate was inflated for a different reason: it  failed to account for mandatory reductions in program costs planned for  the 5-year course of the waiver. These reductions pertain to the state’s use  of upper payment limit (UPL) arrangements. We and the HHS Inspector  General have reported numerous times about state funding arrangements  that inappropriately generated excessive federal matching funds, including  UPL abuses. The Congress and HHS subsequently revised the upper  payment limits and required states to reduce their claims for these  excessive payments over the next several years. Over the course of its 5- year waiver, Illinois will have to reduce its claims by $1.4 billion in  accordance with these requirements. Over this time period, the state’s  total payments to the facilities involved in the UPL arrangements will  decline by 39 percent. Based on this decrease, we estimate that at least  $275 million in impermissible UPL expenses are included in the estimate.  This occurred because Illinois’s calculations of without-waiver costs did  not reflect the required reduction in UPL expenses. Rather, the Illinois  without-waiver cost estimate projected increases in UPL payments by 51  percent over the 5-year life of the waiver. It appears that, in reviewing  Illinois’s budget neutrality justification, HHS did not consider the extent to  which any UPL-related impermissible funds were included. The Secretary  has the authority, however, to revisit this decision and to require the state  to recalculate its estimated without-waiver costs to appropriately account  for the reduction in the amount of UPL expenses.
We have previously reported similar concerns with the approval of  demonstration waivers that were not budget neutral and that could  increase federal Medicaid expenditures. In our 1995 report, we found that,  contrary to the administration’s assertion, the approved spending limits for  demonstration waivers in Oregon, Hawaii, and Florida were not budget  neutral. At that time, we warned that the granting of additional section  1115 waivers merited close scrutiny in part because of the potential  budgetary impact.
section_title: Illinois Waiver Approval Raises Questions about the Extent That HHS Is Ensuring That Waivers Are Fiscally Sound
paragraphs: Another concern related to HHS’s approval of the Illinois waiver is the  extent to which the agency’s oversight ensures that approved waivers are  fiscally sound, in particular related to their likelihood of achieving  projected savings. This concern is separate from budget neutrality; it  centers instead on whether the waiver project is placing the Medicaid or  SCHIP programs in a vulnerable position. The waiver may put Illinois at  financial risk even if federal budget neutrality is maintained. A major  premise behind this initiative is that the prescription drug benefit will pay  for itself by preventing low-income elderly individuals from becoming  Medicaid eligible because of high health care costs, such as those for  hospital and nursing home care. The Congressional Budget Office (CBO),  OMB, and CMS’s own actuary, however, have not accepted this premise, in  assessing the cost of a Medicare prescription drug benefit. There are many  reasons for this caution. According to a preliminary assessment by CBO,  Medicare beneficiaries without any drug coverage already consume a large  number of prescription drugs, and any additional or more expensive drugs  beneficiaries might receive in gaining coverage would probably provide  less-dramatic improvements in health than the drugs they are already  taking. CBO’s assessment stated that greater use of drugs, especially in an  older population, would increase the chances of side effects, allergic  reactions, medication errors, and other adverse drug events, which could  increase the use of hospitals, emergency rooms, and other health care  services. CBO found that research indicating there might be some savings  in providing a Medicare prescription drug benefit have been difficult to  interpret, and concluded that the magnitude of any savings would  probably be quite small. CBO stated that recent evidence has suggested  that the net effect of providing coverage may be to lower the cost of other  services, but that the studies are difficult to interpret, especially in the  context of a Medicare drug benefit, and that more evidence is expected  from evaluations of state-level drug programs for low-income elderly  people.
While Illinois’s approved waiver is intended to evaluate the extent to  which a drug benefit may be able to generate cost savings, it makes several  risky assumptions with regard to the extent of savings, potentially setting a  precedent for other states’ Pharmacy Plus proposals. In Illinois, many of  the people who would gain drug coverage under the waiver are already  receiving some drug coverage benefits under an existing, more limited,  state-funded program. Despite this, the success of the Illinois waiver relies  on assumptions that (1) providing the expanded prescription drug benefit  under the waiver will divert 7,500 people by keeping them from becoming  Medicaid-eligible, when an estimated 20,000 elderly individuals normally  enter Medicaid in a given year, (2) this high diversion rate will occur  immediately, the first year that the drug benefit is provided under the  waiver, and (3) once diverted, aged individuals would stay out of Medicaid  for at least 5 years. The waiver’s underlying assumptions offer little margin  of error. For example, if only half of the projected number of seniors are  diverted in the first year of the waiver, we estimate that the cost of the  waiver could increase by $339 million. The implications for elderly  Medicaid beneficiaries of not achieving the high rate of savings could be  significant. HHS limited total federal risk for this waiver by establishing an  aggregate “cap” for payments to the state for all services to the elderly,  including the drug benefit. However, this cap also means that once the  state has spent up to this limit then it cannot receive additional federal  matching funding for Medicaid services for the elderly. One assessment of  the Illinois financing approach noted that, for any number of reasons,  Illinois could find the costs of operating its new drug program or of  serving elderly Medicaid beneficiaries to be higher than expected. If the  state is unable to achieve savings from diverting people from Medicaid,  then as Illinois officials acknowledge, it may need to choose other options.  Such options could include cutting spending on elderly Medicaid  beneficiaries, cutting spending on its prescription drug program, or paying  for any unanticipated program costs entirely with state funds. The state  could also roll back eligibility for optional elderly beneficiaries, increase  cost sharing, reduce provider reimbursement rates, reduce the size of the  waiver benefit, or eliminate the waiver altogether.
HHS officials stated that this approval represents a true demonstration or  policy experiment, in that the waiver will test whether it is possible to  provide a drug benefit without increasing costs. Officials also pointed out  that the federal risk was limited by the aggregate cap approach. As  indicated earlier, four states have pending waiver proposals similar to  Illinois’s Pharmacy Plus waiver.
section_title: HHS Policy to Ensure Public Input to Waivers Has Not Been Consistently Followed
paragraphs: HHS has not consistently followed its stated policy to ensure that people  who may be affected by waivers have the opportunity to learn about and  comment on waiver proposals. Recognizing that people who may be  affected by a demonstration project “have a legitimate interest in learning  about proposed projects and having input into the decision-making  process,”  HHS established policies and procedures in a 1994 Federal  Register notice for both a federal- and state-level public notice and  comment process. HHS has not provided a federal level notice and  comment period in line with the policy since 1998, and instead has relied  on states to have a public process. The extent of public input varied  greatly among the four states with recently approved waivers. Although  HHS recently affirmed the public input requirements for states, its new  streamlined review process under HIFA may not be sufficient to guarantee  effective public involvement at the federal level.
subsections: section_title: HHS Has Not Followed Its Stated Federal Process For Public Input Since 1998
paragraphs: The 1994 notice specifies HHS’s intent to publish regular notices of all  proposals for section 1115 waivers it receives and to allow a 30-day period  to receive and review written comments before taking official action. The  notice describes the policies and procedures HHS will be guided by when  reviewing section 1115 applications, but is not legally binding. We found  that the last Federal Register notice of a section 1115 application  submission and 30-day comment period was published in 1998. According  to an HHS official, the current agency policy does not include publication  of notices with a 30-day comment period while applications are under  review at HHS because the states are considered to be a more appropriate  forum for public input. Our discussions with HHS officials during the  spring of 2002 indicated that current agency policy was not to release  copies of pending waiver applications to interested parties, but to refer  them to states. In May, the Secretary stated that the agency would publish  waiver applications and background information on its Web site as soon as  possible after receipt; HHS officials subsequently clarified to us that this  includes applications that have been formally submitted but not yet  approved. We were able to find copies of all but one of the pending HIFA  proposals on CMS’s Web site, along with CMS contact names and phone  numbers for each proposal. However, copies of any Pharmacy Plus or  other section 1115 proposals that were not in the HIFA format were not  yet available on the CMS Web site.
One problem with HHS’s decision to defer to the states is that states have  not always released copies of pending waivers when requested by  interested parties. Advocates reported such difficulty obtaining a copy of  Arizona’s waiver application that one organization requested a copy from  HHS under the Freedom of Information Act (FOIA) after the application  had been submitted for review. The FOIA request was made on  November 15, 2001, and the agency responded in January 2002 stating that  it was responding to requests in order of receipt and would notify the  requester “as soon as possible” about the availability of the documents.  Meanwhile, the waiver had already been approved in December 2001. The  approved waiver is now posted on the agency’s Web site, but was not  available to the public during the time it was under review.
section_title: State Compliance with the 1994 Policy Varied Widely in Recently Approved Waivers
paragraphs: The 1994 policy contains provisions for state-level public participation,  including a list of one or more approaches states are expected to follow.  These include    public meetings with copies of the proposal and opportunities to    using a commission where meetings are open to the public;  legislation containing the outline of the waiver proposal;  formal notice and comment through the state’s administrative procedures  act with notice given at least 30 days prior to submission of the waiver;    publication of notice in a newspaper of general circulation including  information on how to obtain a copy and submit comments, with a  comment period of at least 30 days; or    any similar process providing an opportunity for interested parties to learn  about and comment on the proposal.
Such state-level activities allow the public to be informed of and comment  on proposed demonstration programs, but do not necessarily guarantee  consensus on a state’s planned waiver. We found wide variation in the  approaches and level of effort states made to seek and incorporate public  comment on written copies or descriptions of the waiver proposals, as  well as the degree of controversy concerning the state proposals, as  illustrated in the following examples.
California had an extensive public process as well as a statute providing  authorization to seek a waiver. In addition, California conducted  extensive outreach activities, including mailing hundreds of copies of the  waiver application and soliciting comments, holding public hearings, and  presenting the approach at a special legislative hearing.  Illinois, like California, had a statute authorizing the state to seek a waiver  for the pharmacy program expansion, which allowed the state to claim  federal financial participation. The interest groups we contacted did not  raise concerns about the adequacy of the public process.
Utah provided opportunity for groups to discuss the proposed waiver  through meetings that state officials held with provider groups and  committees involved with improving health coverage in the state. Despite  these meetings, advocates and others indicated that in their view the  public process was inadequate given the significance of the state’s  proposal and planned tradeoffs. Participants in some of these meetings  indicated they had little or no opportunity to formally comment on and  influence the waiver proposal. Among other issues, advocates and  providers expressed concern about reduced optional benefits and  increased cost sharing for current beneficiaries, the planned enrollment  fee and co-payments, and lack of specialty services and inpatient hospital  coverage for the waiver expansion population. Specialty physicians and  hospitals would be expected to contribute their services on a volunteer  basis, and community health centers would receive lower payments for  the expansion group. After the waiver was approved, state officials  indicated that inpatient hospital specialty physician services would be  reimbursed, with state-only funds, under certain circumstances.
Arizona did not release copies of its proposal until after it was approved.
Officials indicated that this was because they were negotiating the waiver  with HHS and did not want to release a document that was changing.  Arizona’s HIFA waiver application stemmed from a proposition approved  by state voters in 2000 to extend Medicaid coverage to low-income  childless adults, and a state law enacted in spring 2001 to provide coverage  to parents of SCHIP- and Medicaid-eligible children. Although the HHS  policy lists legislation as an acceptable way to fulfill the public process  requirement, there was a significant change in Arizona’s waiver  application request from what was originally authorized. The section of  the HIFA waiver covering childless adults with SCHIP funding was not  included in the state statute or otherwise made public before the waiver  was approved.
section_title: Streamlined Review Process Raises Additional Concerns
paragraphs: HHS’s new initiatives further reduce the information states must provide  on the extent of their public process. Prior to HIFA, states were required  to indicate in their section 1115 applications specifically how they  complied with HHS’s policy for a public process. The 1994 policy directed  states to include a narrative description of their public process with their  applications, which became part of the administrative record for the  waiver’s approval. Such documentation provided a basis for HHS to  determine whether the state provided an effective notice and comment  process. Consistent with the agency’s commitment to streamlining the  waiver approval process, the HIFA waiver application template allows  states to simply check a box indicating that they followed a public process  that allowed beneficiaries and other interested stakeholders to comment  on the proposal. No description of the state’s public process is required.
HHS has recently emphasized to states that a public process is a priority,  but has not similarly committed to a federal-level process. On May 3, 2002,  CMS sent a letter to all state Medicaid directors encouraging the use of a  public participation process, and stating that the agency would continue to  review section 1115 waiver applications to ensure adherence to the 1994  policy. The letter did not, however, indicate that HHS intended to address  public input at the federal level in line with its stated policy. The extent to  which HHS’s notice to states will ensure a process that provides for  appropriate public input and consideration of comments remains to be  seen. Concerns about the lack of an appropriate public process have been  voiced in other states with pending HIFA waivers.
section_title: Conclusions
paragraphs: In providing section 1115 program demonstration authority under the  Social Security Act, the Congress has indicated its willingness to allow  states to experiment with innovative approaches in certain public  programs to enhance their reach and effectiveness, including coverage of  populations that might otherwise be ineligible for those programs. Over  the years, many uninsured people in various states have benefited from  such experimentation, receiving health insurance coverage otherwise  unavailable to them. Using this same authority, HHS has recently  committed to work with states to provide additional flexibility and more  expedited approvals, including developing specific initiatives, such as  HIFA and Pharmacy Plus. While only a handful of demonstrations have  been approved to date, several other states have similar waivers under  consideration that will likely be influenced by prior decisions and  precedents.
Our review of recently approved waivers, however, raises certain legal and  policy concerns that indicate the need to clearly establish purposes and  populations for which SCHIP funds may be spent. While section 1115  authority provides the Secretary with broad discretion in approving  demonstrations that further the program’s objectives, it also creates the  opportunity for HHS to approve state-operated programs that may not be  consistent with program objectives established by the Congress. In  exercising the section 1115 authority available for the SCHIP program,  recent HHS approvals have allowed SCHIP funds to be spent on  individuals other than the statute’s stated target population: uninsured  low-income children. At issue is the appropriateness of covering two  distinct groups of adults: childless adults and parents or other custodians  of SCHIP- and Medicaid-eligible children. With respect to childless adults,  we believe that HHS has not presented a reasonable basis for authorizing  states to cover childless adults under SCHIP. Furthermore, allowing states  to cover parents with SCHIP funds without demonstrating its cost  effectiveness allows limited program funds to be spent on individuals not  targeted in the statute. In this regard, it is not clear which statutory  objectives should take precedence—those of the SCHIP statute, which  allows for family coverage only to the extent that it does not exceed the  cost of insuring eligible children, or section 1115 authority, which allows  certain statutory provisions—such as cost-effectiveness tests—to be set  aside.
Flexibility and program experimentation must be accompanied by  accountability, as the HIFA name implies. Fiscal accountability is an  important aspect of the Medicaid and SCHIP federal-state partnerships to  ensure, among other things, that both the federal and state governments  pay their fair share of program costs. We found, however, that HHS’s  review did not adequately ensure that two newly approved waivers were  budget neutral, as required as a condition of section 1115 waiver  approvals, because their ceilings included inappropriate or impermissible  costs. Consequently, these waivers have put the federal government at  increased financial risk. HHS approval of waivers that were based on use  of inappropriate methods for demonstrating their budget neutrality is not a  new problem, as we have earlier reported. However, as more states pursue  additional flexibility in their Medicaid and SCHIP programs, HHS has an  opportunity—if not an obligation—to develop more specific and  consistent criteria on acceptable methodologies to predict permissible  future costs and to ensure greater accountability in guarding against  inappropriate federal financial risk.
Accountability should also entail a process of public input that is adequate  to allow for the expression of issues and concerns that affected parties  may have. Expediting the waiver review and approval process is an  important goal. But it is also important to allow for public input into new  and pending program proposals to help assure that proposals are  consistent with overall program goals and that the benefits of waiving  certain provisions justify forgoing their original purposes. Doing so at the  state level facilitates informing those potentially most affected by new  program approaches. However, a federal-level notice and comment  opportunity is also important because approved waivers represent federal  policy that may have influence beyond a single state. It also provides for a  more visible and transparent process for all affected and interested  parties, including the Congress—something that may be better  accomplished at the federal level. For these reasons, we believe there is a  need to adhere to some minimal federal input process for waiver  proposals, such as the HHS policy established in 1994—in response to  earlier concerns about the lack of an open process—that provided for  notification in the Federal Register and a 30-day comment period.
section_title: Matters for Congressional Consideration
paragraphs: We believe the Congress should address three issues we identified in the  course of our work.  Two issues pertain to the availability of SCHIP  funding to provide health insurance coverage to two distinct groups of  adults:  childless adults and parents or guardians of SCHIP-eligible  children.  The third pertains to the need for an improved federal-level  process for public notification and input for state applications for  Medicaid and SCHIP section 1115 demonstration projects.
In our view, HHS’s use of section 1115 authority to allow states to use  SCHIP funds to cover childless adults is not consistent with the program’s  statutory objectives to expand health coverage to uninsured, low-income  children.  Therefore, SCHIP funds should not be available for this purpose.   Further, states’ use of SCHIP funds to cover childless adults decreases the  amount of unspent SCHIP funds available for redistribution in future years  to states with unmet SCHIP needs.  HHS disagrees with our view, asserting  that the objectives of the Arizona HIFA waiver must be viewed as a  comprehensive approach in providing health insurance coverage to those  who were previously uninsured, including childless adults and parents.   Because of the difference in our positions on whether SCHIP funds are  available to cover childless adults, we are raising this to the attention of  Congress for resolution.   Resolving this issue is important not only for the  Arizona waiver but also because of the precedent it sets for additional  pending section 1115 demonstration applications currently under  consideration and for the future availability of SCHIP funds for uninsured,  low-income children.
Therefore, the Congress should consider amending title XXI of the Social  Security Act to specify that SCHIP funds are not available to provide  health insurance coverage for childless adults.  In addition, the Congress  should establish, for parents or guardians of SCHIP-eligible children,  which statutory objectives should take precedence—those of title XXI,  which allow for family coverage only to the extent it does not exceed the  cost of insuring eligible children, or section 1115 authority, which allows  certain statutory provisions—such as cost-effectiveness tests—to be set  aside.
The Congress should also consider requiring the Secretary of HHS to  improve the public notification and input process at the federal level to  ensure that beneficiaries and groups affected by Medicaid and SCHIP  section 1115 demonstration waiver proposals receive opportunity to  review and comment on proposals before they are approved.
section_title: Recommendations for Executive Action
paragraphs: To ensure that SCHIP funds are spent only for authorized purposes, we  recommend that the Secretary of HHS    amend the approval of Arizona’s HIFA waiver to prevent future use of  SCHIP funds on childless adults, and    deny any pending or future state proposals to spend SCHIP funds for this  purpose.
To meet its fiduciary responsibility of ensuring that section 1115 waivers  are budget neutral, we recommend that the Secretary of HHS    better ensure that valid methods are used to demonstrate budget  neutrality, by developing and implementing consistent criteria for  consideration of section 1115 demonstration waiver proposals, and  reconsider Utah and Illinois’s budget neutrality justifications, in light of  our conclusions that certain costs were inappropriate or impermissible  and, to the extent appropriate, adjust the limit on the federal government’s  financial obligation for these waivers.
To improve the opportunity for public input into HHS consideration of  state Medicaid and SCHIP program proposals that waive statutory  requirements, we recommend that the Secretary of HHS provide for a  federal public input process that includes, at a minimum, notice of pending  section 1115 waiver proposals in the Federal Register and a 30-day  comment period in line with HHS’s 1994 policy.
section_title: Agency and State Comments and Our Evaluation
paragraphs: We provided a draft of this report for comment to HHS, OMB, Arizona,  California, Illinois, and Utah. OMB and California declined to provide  written comments. In its general comments, HHS emphasized that  increasing access to health insurance and providing prescription drugs to  senior citizens are among its top priorities, and that given the current state  of the economy, its actions to increase coverage through waivers are  appropriate if not imperative. HHS also highlighted its history of using  section 1115 waivers in the Medicaid program to expand health insurance  coverage for individuals who would not otherwise be eligible for the  program. HHS also commented that, since January 2001, the agency has  approved nearly 1,800 Medicaid and SCHIP state plan amendments,  managed care waivers, home- and community-based waivers, and section  1115 waivers and amendments, but noted that, because of the scope of our  study, our report focused on only 4 of them. We reviewed new section  1115 demonstration waivers in line with the goals of HHS’s new HIFA and  Pharmacy Plus initiatives—initiatives of particular interest because of the  significance of their goals and HHS’s plans to grant states new flexibility to  achieve them—and only 4 had been approved at the time we conducted  our work. We also considered, in addressing certain issues such as budget  neutrality, earlier HHS actions and our own prior work.
HHS disagreed with each of our three recommendations for executive  action. Arizona, Illinois, and Utah also disagreed with various aspects of  our findings leading to these recommendations. A summary of their  concerns and our evaluation follows. HHS’s and states’ comments are  included in appendixes IV through VII.
subsections: section_title: SCHIP Funding for Adults
paragraphs: With regard to our recommendation that the Secretary amend the approval  of Arizona’s HIFA waiver to prevent future use of SCHIP funds on  childless adults, and deny any pending or future state proposals for this  purpose, HHS commented that our analysis was extremely narrow and did  not recognize that the approval of the Arizona HIFA waiver promotes the  objectives of SCHIP by providing health insurance coverage to those who  were previously uninsured. HHS and Arizona both commented that the  approved section 1115 SCHIP demonstration waiver prioritizes spending  SCHIP (title XXI) funds for children. States are not permitted to limit or  cap children’s enrollment, and are required to ensure the availability of  funds for children over funding adult expansion populations. We revised  the report to better clarify these priorities and requirements for the  Arizona waiver. HHS also noted that there were no states that were  entitled to redistributed SCHIP funds that did not receive such funds as a  result of expenditures on section 1115 demonstrations.
We acknowledge that covering the uninsured is an important public policy  goal and that HHS has established coverage of children as a priority for  use of SCHIP funds in the Arizona waiver terms and conditions. We also  acknowledge that states that received redistributed funds in 2002 were not  affected by HHS’s approval of the Arizona waiver. However, any unspent  SCHIP funds available for redistribution to states in future years to cover  uninsured low-income children would be reduced because of the Arizona  approval, and any similar approved state proposals.
We continue to believe that neither HHS nor Arizona has adequately  explained how the objectives of the SCHIP statute—to provide health  assistance to uninsured low-income children—is promoted by insuring  childless adults. In its comments, HHS introduced a new rationale for this  approval: that these adults could become parents or caretaker relatives in  the future. This statement does not clarify how SCHIP funds used for this  purpose would likely support the program’s objectives. To the contrary,  HHS’s assertion that it may use SCHIP funds for childless adults suggests  that it could approve virtually any demonstration project and, thus,  effectively eliminates the requirement that section 1115 demonstration  projects be likely to promote the objectives of the particular program for  which they are authorized. Similarly, HHS’s discussion of the broader  community benefits of the Arizona HIFA waiver does not clarify how it  would likely promote the provision of health assistance to low-income  children. In its detailed comments (number 12), HHS indicated that our  discussion of the scope of the Secretary’s authority under section 1115 is  unnecessary and overbroad in view of the HHS position that the Arizona  HIFA waiver—in its entirety—will promote SCHIP objectives. As  indicated, our discussion was included in response to HHS’s position that  the Secretary need not exercise the section 1115 waiver authority on a  program-by-program basis. Because our positions differ on whether SCHIP  funds are allowable for this purpose, we believe it is important for the  Congress to address this issue. Resolving it is also important because the  Arizona waiver approval sets precedent for future waiver approvals and  funding commitments that could potentially impact on SCHIP funds  available for redistribution to states with unmet SCHIP needs. As a result,  we elevated this issue to a matter for congressional consideration.
Neither HHS nor the states commented on the draft report’s matter for  congressional consideration concerning the use of section 1115 authority  to approve spending SCHIP funds on parents or guardians of SCHIP- eligible children without regard to the statutory cost-effectiveness test.
section_title: Budget Neutrality
paragraphs: HHS, Utah, and Illinois disagreed with our findings supporting the  recommendation that the Secretary better assure that valid methods are  used to demonstrate budget neutrality. For Utah’s estimate, HHS and Utah  stated that the methods used to assure budget neutrality were valid. They  commented that including the costs of a hypothetical population in the  without-waiver costs was appropriate because the state has “current law”  flexibility to cover that population at its own option, that is, the state could  have covered the expansion population through its Medicaid program and  thus should be allowed to consider the associated costs of their coverage  as without waiver costs. We continue to maintain—despite HHS’s  disagreement both currently and in response to our 1995 report—that  states should not be allowed credit for the costs of covering certain  hypothetical populations in their without-waiver cost estimates. Indeed,  the Medicaid statute provides states wide latitude in terms of covered  populations and services and payment rates for those services, and the  federal government will pay its share of covered expenditures in an open- ended manner when the states cover the services under their state  Medicaid plan. If states choose, however, to pursue broader authority  under section 1115, they are required to meet the budget neutrality test. In  the case of Utah and other states we have examined in the past, states had  previously chosen not to cover such optional populations. In our view, to  allow the inclusion of hypothetical costs for hypothetical populations not  previously covered—in an attempt to demonstrate budget neutrality of  new section 1115 demonstration proposals—turns the test of budget  neutrality into a rather hollow exercise.
Regarding our conclusion that HHS allowed Illinois to include  impermissible UPL costs in its baseline, HHS and Illinois each raised a  different concern. HHS indicated that the final regulation implementing  the UPL reduction was not in place at the time of the Illinois waiver  approval. We disagree. The final rule that set new UPLs for nonstate- governmental facilities, including a 150-percent UPL for nonstate- government-owned hospitals and a mandated phase-out of payments  above this limit, was published in January 2001 and effective March 2001,  well before the Illinois waiver was approved in January 2002. A second  rule, to which HHS may have been referring, reduced the UPL for  nonstate-government-owned hospitals from the 150-percent level to 100  percent of what Medicare would pay and was effective May 2002. We  revised the report to clarify the effective dates of these two rules. HHS in  its comments recognized that the UPL reduction may now apply, and  indicated that it was reviewing the budget neutrality cap in light of the new  rules.
Illinois disputed that its budget neutrality projections are inflated by  impermissible costs. The state said that other spending authority found in  the Medicare, Medicaid and SCHIP Benefits Improvement and Protection  Act (BIPA) could have been used by the state in its waiver projection  which would have offset the impact of the inappropriately included UPL  funds. Illinois officials indicated that these costs that could be incurred in  future years should have been considered in our assessment of their  without-waiver estimate. However, the budget neutrality justification that  Illinois submitted to, and was approved by, HHS did not include these  hypothetical costs in the ceiling. The state in its comments did not provide  any evidence that it intended, in the absence of the waiver, to modify its  program so that some of these hypothetical costs would be incurred by the  population covered by the waiver. Illinois officials also indicated that,  even if these BIPA-related costs were not considered, that several  technical corrections should be made to our estimate of impermissible  costs. After the state provided additional documentation for its budget  neutrality analysis, we adjusted our estimate of impermissible UPL costs  accordingly, to $275 million from $356 million. We note, however, that our  methodology and estimate are conservative. We reduced the amount of  UPL payments included in the without-waiver estimate at a lower rate than  what would actually occur, because the detailed data needed to determine  the actual and higher rate of reduction were not available at the time of  our review. We maintain that our estimate, which remains higher than the  estimate that the state developed using its own calculation, is a reasonable  approximation of the impermissible costs included in Illinois’s  justification, and that HHS should revisit the Illinois budget neutrality  justification and source documentation in light of this finding as it has  committed in its comments to do.
Illinois and HHS also disagreed with our conclusions about the fiscal  soundness of the Illinois Pharmacy Plus demonstration, restating that the  premise that the low-income elderly who are provided prescription drug  coverage will be less likely to become eligible for the Medicaid program is  valid. Illinois stated that our report fails to cite any of the studies that  show drug coverage can reduce other medical costs. In the course of our  work, we reviewed all of the supporting research that Illinois cited in its  waiver application. While the cited studies indicated that access to  prescription drugs yielded positive health benefits for people in poor  health, all of them focused on access for people already diagnosed with  specific conditions, such as diabetes, heart disease, and human  immunodeficiency virus (HIV). In our view, the cited research did not  sufficiently support Illinois’s theory that a full pharmacy benefit for the  general near-poor elderly population will yield the amount of savings that  the state depends on for its budget neutrality commitment. Illinois also  commented that we did not identify the full range of actions the state  could take should its estimated savings not materialize, such as  establishing an enrollment cap for the waiver population or increasing  cost sharing. We modified our report to clarify this point.
We do not question that some savings from providing a prescription drug  benefit to low-income elderly may be realized and agree that the premise  may be appropriate for an evaluation. Our major observation remains— that HHS is allowing a high level of risk for the state and its elderly  beneficiaries in the Illinois demonstration, given the specific assumptions  the state has made regarding the substantial savings it expects to gain  from offering a drug benefit to this elderly low-income population. The  state assumes that a drug benefit can largely pay for itself by diverting  thousands of people from becoming Medicaid-eligible and from entering  nursing homes. The state assumes this high diversion rate even though the  majority of the people expected to be covered under the waiver already  receive some drug benefit, albeit a more limited one, under the state’s  existing drug program. A broader point, as we report, is that the diversion  premise is being accepted and applied on a broad scale before its validity  is tested. HHS has encouraged states to submit Pharmacy Plus waivers and  several have done so.
section_title: Public Process
paragraphs: HHS disagreed with our recommendation that the Secretary of HHS  should improve the federal public process, commenting that the current  opportunity for public comment in the waiver process is more than  adequate at both the federal and state levels. HHS stated that CMS  currently posts some proposals on the CMS Web site, such as HIFA  proposals, and intends to post all pending and approved proposals on the  Internet in the future. However, HHS did not specify when in the future it  would do so. When we checked CMS’s Web site, we were able to find  copies of all but one of the pending HIFA proposals, but none of the  Pharmacy Plus proposals and none of the pending proposals requesting  section 1115 waiver authority that were not presented in the HIFA  standard format. Consequently, reliance on the Web site provides an  incomplete source of public information and does not substitute for the  widely accepted Federal Register notice process. Our broader point  remains that because of the variation in the level of public process at the  state level, and because a waiver approval in one state sets precedent for  others, a more formal and consistent federal approach is needed to ensure  that people potentially affected by waivers are aware of the proposals and  have a structured venue for providing input prior to their approval. It  would also provide a centralized focus on issues of national public policy  interest for the Medicaid and SCHIP programs that is otherwise absent  when relying on individual states as the focal point for public dialogue.  Because HHS disagreed with our recommendation to improve the public  notification and input process at the federal level, we elevated this issue to  a matter for congressional consideration.
Utah suggested that we reconsider the discussion in the draft report of the  state’s public process and the concerns raised at the state level with its  waiver. The state indicated that the concerns expressed about the waiver  were apart from whether there was appropriate notice and opportunity for  comment. We agree and have revised the report accordingly. We have  retained, however, some discussion of the concerns with the waiver that  groups we contacted felt were not adequately considered during the state’s  public process. We believe it helps demonstrate the importance of public  input, particularly when proposed demonstration projects are viewed as  controversial.
section_title: Other Comments
paragraphs: HHS and the states provided other comments that were not specific to our  recommendations. Illinois and Utah expressed concerns that the report  implied that HHS’s expedited review was too fast to provide an adequate  review. Utah, for example, indicated that much negotiation between the  state and HHS took place before the waiver was formally submitted. It was  not our intent to link the amount of time that applications were under  consideration with the results of HHS’s approval process for individual  waivers. We revised the report to reflect that more time may be spent than  indicated by formal approval times, because states and HHS may negotiate  waiver proposals prior to their formal submission. We note, however, that  beneficiary advocates raised concerns that these “behind-the-scenes”  negotiations also result in less public awareness and scrutiny of the  specific components of the proposals and that the expedited review times  of the formal proposals may leave less time for public input and discussion  of the written proposals. We believe that these concerns further support  the need for a public process at the federal level once the state has  submitted its proposal, to ensure adequate public notification of the  proposals’ specific components. Finally, HHS provided additional  technical comments. We revised the report to address these comments 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 issuance  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  and Medicaid Services, the Director of the Office of Management and  Budget, 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- 7119. Another contact and other major contributors are included in  appendix VIII.
section_title: Appendix I: Description of Four Recent Section 1115 Waiver Approvals
paragraphs: As of May 1, 2002, HHS had approved 4 of the 13 section 1115 new  demonstration waivers submitted and under review since August 2001.  These include the first 2 HIFA waivers, for Arizona and California; the  expansion of primary care for uninsured individuals in Utah; and the first  Pharmacy Plus waiver for Illinois. The table below provides further  specific details about these 4 approved waivers.
section_title: Appendix II: Section 1115 Waiver Applications under Review
paragraphs: Nine of the 13 section 1115 waiver applications submitted since August  2001 to expand coverage for the uninsured and pharmacy benefits were  still under review by HHS as of June 3, 2002. These proposals—including  4 HIFA applications, 1 uninsured expansion not in HIFA format, and 4  pharmacy proposals—are briefly described below.
section_title: Appendix III: HHS Office of the General Counsel Response to GAO Inquiry
section_title: Appendix IV: Comments from the Department of Health and Human Services
section_title: Appendix V: Comments from the State of Arizona
section_title: Appendix VI: Comments from the State of Illinois
section_title: Appendix VII: Comments from the State of Utah
section_title: Appendix VIII: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: In addition to those named above, Tim Bushfield, Helen Desaulniers, Behn  Miller, Amy Murphy, Suzanne Rubins, Ellen M. Smith, and Stan Stenersen  made key contributions to this report.
section_title: Related GAO Products
paragraphs: Medicaid: HCFA Reversed Its Position and Approved Additional State  Financing Schemes. GAO-02-147. Washington, D.C.: October 30, 2001.
Medicaid: State Financing Schemes Again Drive Up Federal Payments.  GAO/T-HEHS-00-193. Washington, D.C.: September 6, 2000.
Medicare and Medicaid: Implementing State Demonstrations for Dual  Eligibles Has Proven Challenging. GAO/HEHS-00-94. Washington, D.C.:  August 18, 2000.
Children’s Health Insurance Program: State Implementation Approaches  are Evolving. GAO/HEHS-99-65. Washington, D.C.: May 14, 1999.
State Medicaid Financing Practices. GAO/HEHS-96-76R. Washington,  D.C.: January 23, 1996.
Medicaid: Spending Pressures Spur States Toward Program  Restructuring. GAO/T-HEHS-96-75. Washington, D.C.: January 18, 1996.
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.
Medicaid: States Use Illusory Approaches to Shift Program Costs to  Federal Government. GAO/HEHS-94-133. Washington, D.C.: August 1,  1994.