Medicaid Demonstrations: More Transparency and Accountability for Approved Spending Are Needed
Published: 2015-06-24T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The long-term sustainability of the $500 billion joint federal-state Medicaid program is important for the low-income and medically needy populations that depend on it. Section 1115 of the Social Security Act provides the Secretary of Health and Human Services with broad authority to waive certain Medicaid requirements and to authorize federal and state expenditures that would not otherwise be allowed under Medicaid, for experimental or pilot projects likely to promote Medicaid objectives. Spending under section 1115 demonstrations has increased rapidly from about one-fifth of Medicaid expenditures in fiscal year 2011 to close to one-third in fiscal year 2014. Expenditure authorities in approved demonstrations have been used by states to expand Medicaid coverage to individuals and for other purposes. HHS policy requires that demonstrations not increase federal costs for the Medicaid program.
This testimony addresses (1) the types of expenditure authorities HHS has approved for non-coverage-related purposes and whether the approval documentation shows how they promote Medicaid objectives, and (2) HHS's policy and processes for ensuring demonstrations are not likely to raise federal costs. The testimony is based on GAO's April 2015 report on expenditure authorities in demonstrations approved from June 2012 through mid-October 2013 ( GAO 15 239 ) and several GAO reports issued from 2002 to 2014 addressing HHS's policies and practices for ensuring demonstrations are budget neutral.
section_title: What GAO Found
paragraphs: In April 2015, GAO found that under Medicaid section 1115 demonstrations—experimental or pilot projects to test new ways of providing services which account for nearly one-third of Medicaid expenditures—the Department of Health and Human Services (HHS) had authorized expenditures not otherwise allowed under Medicaid for a broad range of purposes beyond expanding coverage. How these expenditure authorities promoted Medicaid objectives was not always apparent. In the 25 states' demonstrations GAO reviewed, two types of non-coverage-related expenditure authorities—state-operated programs and funding pools—were significant in the amounts of spending approved. GAO found that
HHS allowed five states to spend up to $9.5 billion in Medicaid funds to support over 150 state-operated programs. The programs were wide-ranging in nature, such as workforce training, housing, and public health programs, and operated by a wide range of state agencies, such as educational institutions, corrections, aging, and public health agencies, and could have received funding from other sources.
HHS allowed eight states to spend more than $26 billion to establish capped funding pools through which states could make payments to hospitals and other providers for a range of purposes, including payments to incentivize hospital infrastructure or other improvements.
How the approved expenditures for the state-operated programs and funding pools would promote Medicaid objectives was not always clear in HHS's approval documentation. For example, some state programs approved for funding appeared to be only tangentially related to health coverage for low-income individuals. Although section 1115 of the Social Security Act provides HHS with broad authority in approving expenditure authorities that, in the Secretary's judgment, are likely to promote Medicaid objectives, GAO found that HHS has not issued specific criteria for making these determinations.
In multiple reports, issued from 2002 to 2014, GAO also found that HHS's policy and process for approving state spending limits under demonstrations have lacked transparency and have not ensured that demonstrations will be budget neutral to the federal government. The criteria and methods used to set spending limits were not always clear or well supported, such that approved spending limits for some demonstrations were billions of dollars higher than what was supported. For example, for five demonstrations GAO reviewed in 2013 and 2014, using assumptions suggested by HHS's policy, GAO found that spending limits would have been $33 billion lower than what was actually approved.
In its 2015 report and prior work, GAO has made multiple recommendations to HHS aimed at (1) improving the transparency of approved spending and how it furthers Medicaid purposes and (2) ensuring Medicaid demonstrations do not increase federal costs. HHS generally agreed to improve its expenditure authority approval documentation, but did not agree with several other recommendations aimed at improving its approval policies and processes and transparency. GAO maintains that, unless HHS takes the actions necessary to implement GAO's prior recommendations, tens of billions of dollars could be at risk.

section_title: Letter
paragraphs: I am pleased to be here today as you examine federal approval of state  Medicaid demonstrations, a significant and growing proportion of  Medicaid expenditures. Section 1115 of the Social Security Act provides  the Secretary of Health and Human Services with broad authority to  waive many traditional federal Medicaid requirements when approving  Medicaid demonstrations. The Secretary can use the authority to provide  states with flexibility for experimenting with delivering services outside  Medicaid’s traditional rules. However, certain parameters apply. Under  law, Medicaid demonstrations must, as determined by the Secretary, be  likely to promote Medicaid objectives. By policy, demonstrations should  be budget neutral, that is, should not increase the federal government’s  costs for Medicaid. One key aspect of the broad authority under section  1115 is that it allows the Secretary to approve new types of expenditures  under demonstrations. Expenditure authorities approved in these  demonstrations allow states to receive federal funds for costs that would  not otherwise be eligible for federal matching funds under Medicaid. In  other words, the Secretary may allow states to effectively turn what  otherwise would not be considered an allowed Medicaid cost into a  covered Medicaid cost, as part of their demonstrations. Expenditures for  demonstrations are a rapidly increasing proportion of Medicaid  expenditures. In fiscal year 2011, section 1115 demonstrations governed  about one-fifth of Medicaid expenditures, rising to nearly one-third of total  Medicaid expenditures in fiscal year 2014, an estimated $89 billion in  federal funds.
Historically, many states sought section 1115 demonstrations to provide  health coverage to individuals who could not be covered under traditional  Medicaid rules. But in recent years, the Department of Health and Human  Services (HHS) has approved demonstrations for many other purposes.
My testimony today will cover our work related to the Secretary’s  approvals of Medicaid demonstrations. My remarks will summarize some  of our key findings about HHS’s approvals, in particular (1) the types of  expenditure authorities for non-coverage-related purposes that HHS has  recently approved and whether approval documentation shows how they  promote Medicaid objectives, and (2) HHS’s policy and processes for  ensuring that approved Medicaid demonstrations are not likely to raise  federal costs.
My remarks on the types of expenditure authorities HHS has approved  are based on findings from our April 2015 report, which examined  expenditure authorities approved in demonstrations for non-coverage- related purposes and the criteria HHS used to determine whether  expenditure authorities were likely to promote Medicaid objectives. For  that report, we examined new demonstrations, as well as extensions or  amendments to existing demonstrations, approved by HHS from June  2012 through mid-October 2013. We identified a total of 25 states that  received approvals during this time. We examined the approval  documents for each demonstration, including the special terms and  conditions, which set forth HHS’s conditions and limitations for the  demonstration; interviewed HHS officials; and obtained additional  documentation from HHS to identify the criteria used for approval and  how the department documented that states’ demonstrations met such  criteria. My remarks regarding HHS’s policy and processes for ensuring  that Medicaid demonstrations are budget neutral are based on multiple   For these reports, we  reports we have produced on this topic since 2002.reviewed documentation for selected new comprehensive demonstrations  at the time, as well as budget neutrality analyses prepared by the states  and submitted to HHS. We compared the spending limits approved by  HHS with our estimates of the spending limits following HHS’s policy. We  also reviewed HHS’s policy and interviewed agency officials. The reports  cited provide further details on our scope and methodology.
We conducted the work on which this statement is based in accordance  with generally accepted government auditing standards. Those standards  require that we plan and perform the audit to obtain sufficient, appropriate  evidence to provide a reasonable basis for our findings and conclusions  based on our audit objectives. We believe that the evidence obtained  provides a reasonable basis for our findings and conclusions based on  our audit objectives.
subsections: section_title: Background
paragraphs: Medicaid is a joint federal-state program that finances health care  coverage for low-income and medically needy individuals. In fiscal year  2014, Medicaid covered on average an estimated 65 million beneficiaries  at an estimated cost of over $500 billion. States pay for Medicaid- covered services provided to eligible individuals under a federally  approved Medicaid state plan, and the federal government pays its share  of a state’s expenditures.
States that wish to change their Medicaid programs in ways that deviate  from certain federal requirements may seek to do so under the authority  of an approved demonstration. Section 1115 of the Social Security Act  authorizes the Secretary of Health and Human Services to waive certain  federal Medicaid requirements and to allow costs that would not  otherwise be eligible for federal matching funds—through “expenditure  authorities”—for experimental, pilot, or demonstration projects that, in the  Secretary’s judgment, are likely to assist in promoting Medicaid  objectives. The demonstrations provide a way for states to test and  evaluate new approaches for delivering Medicaid services. To obtain  approval, states submit applications for section 1115 demonstrations to  HHS for review. Upon approval, HHS issues an award letter to the state  and an approval specifying the Medicaid requirements that are being  waived, the expenditure authorities approved, and the special terms and  conditions detailing the requirements for the demonstration. HHS typically  approves a section 1115 demonstration for a 5-year period that can be  amended or extended.
Under HHS policy in place since the early 1980s, section 1115  demonstrations should be budget neutral to the federal government. In  other words, the Secretary should not approve demonstrations that would  increase federal costs for the state’s Medicaid program beyond what the  federal government would have spent without the demonstration. To have  a budget-neutral demonstration, generally a state must establish that its  planned changes to its Medicaid program—including receiving federal  matching funds for otherwise unallowable costs—will be offset by savings  or other available Medicaid funds. Once approved, each demonstration  operates under a negotiated budget neutrality agreement that places a  limit on federal Medicaid spending over the life of the demonstration,  typically 5 years. According to HHS’s policy, demonstration spending  limits are based on states’ projected costs of continuing their Medicaid  programs without a demonstration. The higher the projected costs without  a demonstration, the more federal funding states are eligible to receive for  the demonstration. HHS’s policy calls for establishing a spending base  using a state’s actual historical spending from a recent year and  projecting spending over the course of the demonstration using certain  growth rates established in policy.
section_title: HHS Approved Expenditure Authorities Allowing States to Fund State Programs and New Types of Funding Pools Without Clearly Showing How They Furthered Medicaid Objectives
paragraphs: HHS approved expenditure authorities for a broad range of purposes  beyond expanding Medicaid coverage to individuals, including state- operated programs and funding pools. However, how these programs and  funding pools would further Medicaid objectives was not always apparent  from HHS’s documentation. Recent approvals highlight the need for  specific criteria and clear documentation to show how demonstrations  further Medicaid purposes.
subsections: section_title: HHS Approved Expenditure Authorities Allowing States to Fund State Programs, but How Programs Would Promote Medicaid Objectives Was Not Always Clear
paragraphs: In our April 2015 report examining recent demonstration approvals in 25  states, we found that HHS had approved expenditure authorities allowing  5 states to receive federal Medicaid matching funds for state expenditures  for more than 150 state-operated programs. Prior to the demonstrations,  these programs were not coverable under Medicaid. The 5 states were  approved to spend up to $9.5 billion in Medicaid funds (federal and state)  for these programs during their current demonstration approval periods,  which ranged from 2.5 to 5 years.
The state programs were operated or funded by a wide range of different  state agencies, such as state departments of mental health, public health,  corrections, youth services, developmental disabilities, aging, and state  educational institutions. Prior to being included in the demonstrations,  these programs could have been financed with state or non-Medicaid  federal funding sources, or a combination of these, such as state  appropriations or non-Medicaid federal grant funding. Under the  demonstrations, states must first allocate and spend state resources for  programs to receive federal Medicaid matching funds. The federal  matching funds received could replace some of the state’s expenditures  for the programs, freeing up state funding for other purposes. For  example, states could use the freed-up state funding to invest in health  care quality improvement efforts or health reform initiatives or simply to  address shortfalls in states’ budgets.
The expenditure authorities for state programs supported a broad range  of state program costs that would not otherwise have been eligible for  federal Medicaid funding. Although many of the programs offered health- related services, such as prostate cancer treatment and newborn  immunizations, not all were necessarily income-based. In addition to  programs providing health-related services, other state programs  authorized to receive funding included those providing support services to  individuals and families, for example, to non-Medicaid-eligible individuals;  those providing access to private insurance coverage for targeted groups;  and those funding health care workforce training programs. Overall, state  programs that were approved for federal Medicaid funds appeared to be  wide ranging in nature.
How funding for these state-operated programs would likely promote  Medicaid objectives was not always clear from HHS’s approval  documents. We found that the documents did not consistently include  information indicating what, specifically, the approved expenditures for  state programs were for and, therefore, how they would likely promote  Medicaid objectives. State programs approved by HHS were generally  listed by program name in the special terms and conditions of each  state’s approval, but often without any further detailed information.  Examples of state program names listed in the approval documents  included a healthy neighborhoods program, grants to councils on aging,  childhood lead poisoning primary prevention, and a state-funded  marketplace subsidies program. A full listing of the state programs funded  by expenditure authorities we reviewed is included in appendix I.
Further, we found that several state programs approved for federal  Medicaid funds appeared, based on information in the approvals, to be  only tangentially related to improving health coverage for low-income  individuals and lacked documentation explaining how their approval was  likely to promote Medicaid objectives. For example, the purposes of some  programs approved included funding insurance for fishermen and their  families at a reduced rate; constructing supportive housing for the  homeless; and recruiting and retaining health care workers. For two of the  five states we reviewed, HHS’s approvals included additional details  beyond the program names about the programs—including program  descriptions and target populations—in the special terms and conditions.  Such information can help explain how the programs may promote  Medicaid objectives; however, we found that even when such information  was included, HHS’s basis for approving expenditure authorities for some  state programs was still not transparent. For example, one state received  approval to claim matching funds for spending on a state program that  issues licenses and approves certifications of hospitals and other  providers in the state. While the terms and conditions delineated the  program’s mission and funding limits, it did not explicitly address how the  program related to Medicaid objectives. The approvals for the other three  states, accounting for nearly half of the more than 150 state programs in  our review, lacked information on how the state programs would promote  Medicaid objectives, such as how they would benefit low-income  populations.
We also found that HHS’s approvals varied in the extent to which they  provided assurances that Medicaid funding for state programs would not  duplicate any other potential sources of non-Medicaid federal funding. In  two of the five states we reviewed, the terms and conditions identified all  other federal and nonfederal funding sources for each state program and  included specific instructions on how states should “offset” other revenues  received by the state programs related to eligible expenditures. The  approval for a third state did not identify other funding sources received  by each program but included a general program integrity provision  requiring the state to have processes in place to ensure no duplication of  federal funding. In contrast, the approvals for two states did not identify  other federal and nonfederal funding sources for each program and  lacked language expressly prohibiting the states’ use of funding for the  same purposes.
section_title: HHS Approved Expenditure Authorities Allowing States to Establish Funding Pools, but Links to Medicaid Purposes Were Not Always Transparent
paragraphs: Another major type of non-coverage-related expenditure authority that  HHS approved allowed states to make new kinds of supplemental  payments—that is, payments in addition to base payments for covered  services—to hospitals and other providers. In our April 2015 report, we  found that HHS approved expenditure authorities in eight states for   pools of dedicated funds—called funding pools—amounting to more than  $26 billion (federal and state share) over the course of the current  approvals, which ranged from 15 months to over 5 years. These  expenditure authorities allowed states to receive federal Medicaid funds  for supplemental payments made to providers for uncompensated care or  for delivery system or infrastructure improvements. In addition, some  states had funding pools approved for other varied purposes, such as  graduate medical education.
Funding pools for hospital uncompensated care costs. In our April  2015 report, we found that HHS approved expenditure authorities in  six states to establish or maintain hospital uncompensated care  funding pools for a total of about $7.6 billion (federal and state) in  approved spending.
Funding pools for incentive payments to hospitals. HHS also  approved new expenditure authorities in five states for funding pools  to make incentive payments to promote health care delivery system or  infrastructure improvements for nearly $18.8 billion (federal and state  share) in spending. These expenditure authorities were for payments to incentivize hospitals or their partners to make a variety of  improvements, such as lowering hospitals’ rates of adverse events or  incidence of disease, improving care for patients with certain  conditions, and increasing delivery system capacity.
As with approvals of expenditure authorities for state programs, we found  that HHS’s approvals of expenditure authorities for funding pools also did  not consistently document how expenditures would likely promote  Medicaid objectives. The approvals of incentive payment funding pools  we reviewed established a structure for planning, reporting on, and  getting paid for general, system-wide improvements—for example,  increasing primary care capacity or lowering admission rates for certain  diseases—but most provided little or no detail on how the initiatives  related to Medicaid objectives, such as their potential impact on Medicaid  beneficiaries or low-income populations. Further, the criteria for selecting  providers eligible to participate in incentive pools were not apparent in  most of the approvals we reviewed. HHS’s approvals typically listed  eligible providers but with no additional information about their role in  providing services to Medicaid populations. For example, none of the  terms and conditions for the five states’ demonstrations that we reviewed  established a minimum threshold of Medicaid or low-income patient  volume as the basis for participation; however, three of the five states’  approvals required that the payment allocations be weighted in part on  measures of Medicaid or low-income patient workload.
We also found that the approvals for incentive payment funding pools  varied in the extent to which they provided assurances that Medicaid  funding for these initiatives would not duplicate other sources of federal  funding. The terms and conditions for only one of the five states required  the state to demonstrate that its funding pool was not duplicating any  other existing or future federal funding streams for the same purpose.  Two other states’ terms and conditions required hospitals to demonstrate  that incentive projects did not duplicate other HHS initiatives. The extent  to which approvals for uncompensated care pools included protections  against potential duplication of federal funds was somewhat mixed. The  approvals placed some limits on the potential overlap between payments  to individual providers from the uncompensated care pool and Medicaid’s  Disproportionate Share Hospital program, which provides allotments to  states for payments to hospitals that serve a disproportionate share of  low-income and Medicaid patients. We found that HHS consistently  included a requirement that when states calculate their Disproportionate  Share Hospital payment limits for individual hospitals, they include as  offsetting revenue any payments for inpatient or outpatient services the  hospitals may have received from the uncompensated care pool. Aside  from instructions about the Disproportionate Share Hospital program,  however, the approvals generally did not explicitly prohibit other  potentially duplicative sources of funding, such as grants awarded under  other federal programs.
section_title: HHS’s Recent Approvals Highlight the Need for Specific Criteria and Clear Documentation to Show How Expenditure Authorities Further Medicaid Objectives
paragraphs: While section 1115 of the Social Security Act provides HHS with broad  authority in approving expenditure authorities for demonstrations that, in  the Secretary’s judgment, are likely to promote Medicaid objectives, as  we reported in April 2015, according to HHS officials, the agency has not  issued explicit criteria explaining how it assesses whether demonstration  expenditures meet this broad statutory requirement. HHS officials also  told us that for a demonstration to be approved, its goals and purposes  must provide an important benefit to the Medicaid program, but they did  not provide more explicit criteria for determining whether approved  demonstration expenditures would provide an important benefit or  promote Medicaid objectives. HHS officials also said that it is not in the  agency’s interest to issue guidelines that might limit its flexibility in  determining which demonstrations promote Medicaid objectives.
Given the breadth of the Secretary’s authority under section 1115—the  exercise of which may result in billions of dollars of federal expenditures  for costs not otherwise allowed under Medicaid, we recommended in April  2015 that HHS issue criteria for assessing whether section 1115  expenditure authorities are likely to promote Medicaid objectives. HHS  partially concurred with this recommendation, stating that all section 1115  demonstrations are reviewed against “general criteria” to determine  whether Medicaid objectives are met, including whether the  demonstration will (1) increase and strengthen coverage of low-income  individuals; (2) increase access to, stabilize, and strengthen providers  and provider networks available to serve Medicaid and low-income  populations; (3) improve health outcomes for Medicaid and other low- income populations; and (4) increase the efficiency and quality of care for  Medicaid and other low-income populations through initiatives to  transform service delivery networks. HHS was silent, however, as to  whether it planned to issue written guidance on these general criteria, and  we maintain that these general criteria are not sufficiently specific to allow  a clear understanding of what HHS considers in reviewing whether  expenditure authorities are likely to promote Medicaid objectives. For  example, although each of HHS’s four general criteria relates to serving  low-income or Medicaid populations, HHS does not define low-income or  what it means to serve these individuals.
In our April 2015 report, we also emphasized the importance of HHS  documenting the basis for its approval decisions and showing how  approved expenditure authorities are likely to promote Medicaid’s  objectives. Without such documentation, HHS cannot provide reasonable  assurance that it is consistently applying its criteria for determining  whether demonstration expenditures promote Medicaid objectives. We  recommended that HHS ensure the application of its criteria for assessing  section 1115 demonstrations is documented in all approvals, to inform  stakeholders—including states, the public, and Congress—of the basis  for its determinations that approved expenditure authorities are likely to  promote Medicaid objectives. HHS concurred with this recommendation,  stating that it will ensure that all future section 1115 demonstration  approval documents identify how each approved expenditure authority  promotes Medicaid objectives.
Finally, we recommended that HHS take steps to ensure that  demonstration approval documentation consistently provides assurances  that states will avoid duplicative spending by offsetting as appropriate all  other federal revenues when claiming federal Medicaid matching funds. In  response, HHS said it would take steps to ensure approval  documentation for state programs, uncompensated care pools, and  incentive payment pools consistently provides assurances that states will  avoid duplication of federal spending.
section_title: HHS’s Policy and Process for Approving Spending Limits Lack Transparency and Do Not Provide Assurances That Demonstrations Will Be Budget Neutral
paragraphs: HHS’s policy and process for approving state spending on Medicaid  demonstrations lack transparency and do not provide assurances that  demonstrations will be budget neutral for the federal government.  Longstanding concerns support the need for budget neutrality policy and  process reform.
subsections: section_title: HHS’s Budget Neutrality Policy and Process Lack Transparency
paragraphs: GAO’s prior work has found that HHS’s policy and process for  determining state demonstration spending limits lack transparency related  to the criteria and evidence used to support state spending limits, and the  most recent written policy, issued in 2001, does not reflect HHS’s actual  practices. Spending limits are based on states’ estimated costs of  continuing their Medicaid programs without the proposed demonstration.  According to HHS policy, demonstration spending limits should be  calculated by estimating future costs of baseline spending—using actual  Medicaid costs, typically from the most recently completed fiscal year— and applying a benchmark growth rate (which is the lower of the state- specific historical growth rates for a recent 5-year period and estimates of   HHS officials reported that their policy and  nationwide Medicaid growth).process allow for negotiations in determining spending limits, including  adjustments to the growth rates used to project baseline costs. For  example, if there are documented anomalies in historical spending data,  adjustments can be made so that projected spending is accurate.  However, HHS’s policy does not specify criteria and methods for such  adjustments or the documentation and evidence that are needed to  support adjustments.
GAO, Medicaid Demonstration Waivers: Approval Process Raises Cost Concerns and  Lacks Transparency, GAO-13-384 (Washington, D.C.: June 25, 2013) any adjustments. But HHS officials did not have documentation for the  agency’s process or policy on when estimates are allowed or an  explanation for what type of documentation of adjustments is required.
section_title: HHS Approved Spending Limits Have Not Ensured Demonstrations Are Budget Neutral
paragraphs: Between 2002 and 2014, we have reviewed more than a dozen states’  approved comprehensive demonstrations and found that HHS had not  consistently ensured that the demonstrations would be budget neutral.  We found that HHS has allowed states to use questionable methods and  assumptions for their spending baselines and growth rates in projecting  spending, without providing adequate documentation to support them. In  particular, HHS allowed states to make adjustments that allowed for cost  growth assumptions that were higher than growth rates based on  historical spending and nationwide spending, without adequate support  for the deviations from these benchmarks included in its policy. HHS also  allowed states to include costs in the baseline spending that the state  never incurred. In some cases, these practices allowed states to add  billions of dollars in costs to their projected spending. For example, in our  2013 report, we found that
One state’s approved spending limit for 2011 through 2016 was based  on outdated information on spending—1982 data were projected  forward to represent baseline spending and state-specific historical  spending growth for a recent period. Had baseline expenditures and  benchmark growth rates been based on recent expenditure data that  were available, the 5-year spending limit would have totaled about  $26 billion less, and the federal share of this reduction would have  been about $18 billion.
Another state’s approved spending limit for 2011 through 2016  included hypothetical costs in the state’s estimate of its baseline  spending; that is, costs the state had not incurred were included in the  base year spending estimate. These costs represented higher  payment amounts that the state could have paid providers during the  base year, but did not actually pay. For example, the state base year  included costs based on the state’s hypothetically paying hospitals the  maximum amount allowed under federal law, although the state had  not paid the maximum amount. We estimated that had the state  included only actual expenditures as indicated by HHS’s policy, the   5-year spending limit would have totaled about $4.6 billion less, and  the federal share of this reduction would have been about $3 billion.
Allowing questionable assumptions and methods increases projected  spending and allows for significant increase in federal costs. We have  found that had HHS developed demonstration spending limits based on  levels suggested by its policy, spending limits would have been tens of  billions of dollars lower. For example, for five states’ demonstrations we  reviewed in our 2013 and 2014 reports, we estimate that had HHS used  growth rates consistent with its policy and allowed only actual costs in  base year spending, demonstration spending limits would have been  almost $33 billion lower than what was actually approved.The federal share of the $33 billion reduction would constitute an  estimated $22 billion.   (See table 1.)
section_title: Longstanding Concerns About HHS Spending Limit Approvals Support Need for Budget Neutrality Policy and Process Reforms
paragraphs: Our concerns with HHS’s process and criteria are long-standing, and our  recommendations for improving HHS’s policy and process have not yet  been addressed. On several occasions since the mid-1990s, we have  found that HHS had approved demonstrations that were not budget  neutral to the federal government, and we have made a number of  recommendations to HHS to improve the budget neutrality process, but  HHS has not agreed. Specifically, we have recommended that HHS   (1) better ensure that valid methods are used to demonstrate budget  neutrality, (2) clarify criteria for reviewing and approving demonstration  spending limits, and (3) document and make public the bases for  approved spending limits. In 2008, because HHS disagreed with our  recommendations—maintaining that its review and approval process was  sufficient—we suggested that Congress consider requiring the Secretary  of Health and Human Services to improve the department’s review criteria  and methods by documenting and making clear the basis for approved  spending limits. In 2013, we further recommended that HHS update its  written budget neutrality policy to reflect the actual criteria and processes  used to develop and approve demonstration spending limits, and ensure  the policy is readily available to state Medicaid directors and others. HHS  disagreed with this recommendation, stating that it has applied its policy  consistently. However, based on multiple reviews of Medicaid  demonstrations, we continue to believe that HHS must take actions to  improve the transparency of its demonstration approvals.
In conclusion, section 1115 Medicaid demonstrations provide HHS and  states with a powerful tool for testing and evaluating new approaches for  potentially improving the delivery of Medicaid services to beneficiaries. In  using the broad authority provided under section 1115, the Secretary has  responsibility for the prudent use of federal Medicaid resources, including  ensuring that demonstration expenditures promote Medicaid objectives  and do not increase overall federal Medicaid costs. Our work has shown,  however, that it has not always been clear how approved demonstration  spending relates to Medicaid objectives. For example, several state  programs that were approved for Medicaid spending that we reviewed  appeared, based on information in the approvals, to be only tangentially  related to improving health coverage for low-income individuals. HHS’s  approved expenditure authorities can set new precedents for other states  to follow and raise potential for overlap with other funding streams.  Similarly, we have had longstanding concerns, dating back decades, that  HHS’s policy and process for approving total spending limits under  demonstrations have not always ensured that spending under  demonstrations will not increase federal Medicaid costs. As section 1115  demonstrations have become a significant and growing proportion of  Medicaid expenditures, ensuring that demonstration expenditures are  linked to Medicaid purposes and are budget neutral is even more critical  to ensuring the long-term sustainability of the program, upon which tens  of millions of low-income beneficiaries depend to cover their medical  costs. Without clear criteria, policies, appropriate methods for developing  spending limits, and improved documentation of the bases for decisions,  HHS’s demonstration approvals affecting tens of billions in federal  spending will continue to lack transparency and to raise concerns about  the fiscal stewardship of the program.
Chairman Pitts, Ranking Member Green, and Members of the  Subcommittee, this concludes my prepared statement. I would be  pleased to respond to any questions that you might have at this time.
section_title: GAO Contact and Staff Acknowledgments
paragraphs: If you or your staff have any questions about this testimony, please  contact Katherine Iritani, Director, Health Care at (202) 512-7114 or  iritanik@gao.gov. Contact points for our Offices of Congressional  Relations and Public Affairs may be found on the last page of this  statement. GAO staff who made key contributions to this testimony are  Catina Bradley, Assistant Director; Tim Bushfield, Assistant Director;  Christine Davis; Shirin Hormozi; Linda McIver; Roseanne Price; and  Emily Wilson.
section_title: Appendix I: State Programs Funded by Expenditure Authorities in Section 1115 Demonstrations
paragraphs: From June 2012 through mid-October 2013, five states received approval  from the Department of Health and Human Services (HHS) for section  1115 demonstrations that included expenditure authorities allowing  funding for state programs. Table 2 shows examples of the names of the  state programs funded in the terms and conditions of each state’s  approval documentation. Often there was no further detailed information  regarding the approved programs.
section_title: Related GAO Products
paragraphs: Medicaid Demonstrations: Approval Criteria and Documentation Need to  Show How Spending Furthers Medicaid Objectives. GAO-15-239.  Washington, D.C.: April 13, 2015.
High-Risk Series: An Update. GAO-15-290. Washington, D.C.:   February 11, 2015.
Medicaid Demonstrations: HHS’s Approval Process for Arkansas’s  Medicaid Expansion Waiver Raises Concerns. GAO-14-689R.  Washington, D.C.: August 8, 2014.
Cost Savings – Health – Medicaid Demonstration Waivers.   GAO-14-343SP. Washington, D.C.: April 2014.
Medicaid Demonstration Waivers: Approval Process Raises Cost  Concerns and Lacks Transparency. GAO-13-384. Washington, D.C.:  June 25, 2013.
Medicaid Demonstration Waivers: Recent HHS Approvals Continue to  Raise Cost and Oversight Concerns. GAO-08-87. Washington, D.C.:  January 31, 2008.
Medicaid Demonstration Projects in Florida and Vermont Approved under  Section 1115 of the Social Security Act. B-309734. July 27, 2007.
Medicaid Demonstration Waivers: Lack of Opportunity for Public Input  during Federal Approval Process Still a Concern. GAO-07-694R.  Washington, D.C.: July 24, 2007.
Medicaid Waivers: HHS Approvals of Pharmacy Plus Demonstrations  Continue to Raise Cost and Oversight Concerns. GAO-04-480.  Washington, D.C.: June 30, 2004.
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.
Medicaid Section 1115 Waivers: Flexible Approach to Approving  Demonstrations Could Increase Federal Costs. GAO/HEHS-96-44.  Washington, D.C.: November 8, 1995.
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