Ryan White CARE Act: Effects of Certain Funding Provisions on Grant Awards
Published: 2009-09-18T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Funds are made available under the Ryan White Comprehensive AIDS Resources Emergency Act of 1990 (CARE Act) for individuals affected by HIV/AIDS. Part A provides for grants to metropolitan areas and Part B provides for grants to states and territories and associated jurisdictions for HIV/AIDS services and for AIDS Drug Assistance Programs (ADAP). The Ryan White HIV/AIDS Treatment Modernization Act of 2006 (RWTMA) reauthorized CARE Act programs for fiscal years 2007 through 2009. RWTMA requires name-based HIV case counts for determining CARE Act funding, but an exemption allows the use of code-based case counts through fiscal year 2009. RWTMA formulas include hold-harmless provisions that protect grantees' funding at specified levels. RWTMA also included provisions under which Part A and B grantees with unobligated balances over 2 percent at the end of the grant year incur a penalty in future funding. GAO was asked to examine CARE Act funding provisions. This report provides information on (1) how many Part B grantees collect and use name-based HIV case counts for CARE Act funding; (2) the distribution of Part A hold-harmless funding; and (3) reductions in Part B grantees' funding due to unobligated balance provisions. GAO reviewed agency documents and analyzed data on CARE Act funding. GAO interviewed 19 grantees chosen by geography, number of HIV/AIDS cases, and other criteria. GAO also interviewed federal government officials and other experts.
section_title: What GAO Found
paragraphs: Forty-seven of the total 59 Part B grantees had the Health Resources and Services Administration (HRSA) use their name-based HIV case counts to determine CARE Act formula funding for fiscal year 2009. The remaining 12 grantees had HRSA use their code-based HIV case counts to determine fiscal year 2009 CARE Act funding. If the exemption permitting code-based reporting is not extended, it is likely that future fiscal year funding will be based exclusively on name-based counts. Any Part B grantees who currently have name-based HIV reporting systems, but that had not been collecting name-based HIV case counts long enough to include all cases, could face a reduction in fiscal year 2010 funding. Part A hold-harmless funding was more widely distributed among eligible metropolitan areas (EMA) in fiscal year 2009 than in fiscal year 2004, the last year for which we reported this information. Seventy-one percent of EMAs received hold-harmless funding in fiscal year 2009, whereas 41 percent received hold-harmless funding in fiscal year 2004. In fiscal year 2009, $24,836,500 in hold-harmless funding was distributed compared to $8,033,563 in fiscal year 2004. However, the range of CARE Act hold-harmless funding among EMAs, as measured by funding per case, was smaller in 2009 than in 2004. In fiscal year 2009, EMAs received from $0 to $208 in hold-harmless funding per case. In fiscal year 2004, EMAs received between $0 and $1,020 in hold-harmless funding per case. The hold-harmless funding resulted in EMAs receiving formula funding ranging from $645 to $854 per case in fiscal year 2009 and from $1,221 to $2,241 per case in fiscal year 2004. Sixteen Part B grantees had reductions in their grant year 2009 funding due to their unobligated balances at the end of grant year 2007. Part B base grant penalties ranged from $6,433 in Palau to $1,493,935 in Ohio. ADAP base grant penalties ranged from $26,233 in Maine to $12,670,248 in Pennsylvania. Part B grantees with unobligated funds provided various reasons for these balances, and said that some of these reasons were beyond their control. Grantees and HRSA stated that a requirement to spend drug rebate funds before obligating federal funds makes it more difficult to avoid unobligated balances. Twenty- seven ADAPs purchase drugs exclusively through a federal drug discount program, under which they pay full price and receive a rebate at some point in the future. HRSA sought to address the interaction between drug rebate funds and the RWTMA unobligated balance provisions by requesting from the Department of Health and Human Services (HHS) permission to seek an exemption for grantees from the relevant regulations from the Office of Management and Budget. However, HHS denied this request, stating that the justification HRSA presented for requesting the exemption was "not compelling." HHS provided technical comments on a draft of this report, which GAO incorporated as appropriate.

section_title: Letter
paragraphs: It has been more than 28 years since the first cases of acquired  immunodeficiency syndrome (AIDS) in the United States were reported in  June 1981. Since then, approximately 1.7 million Americans have been  infected with human immunodeficiency virus (HIV), including more than  580,000 who have died. The Centers for Disease Control and Prevention  (CDC) estimates that approximately 1.1 million people were living with  HIV infection in the United States at the end of 2006, and that there were  56,300 new HIV infections in that year. CDC estimates HIV/AIDS case  counts based on information it receives from states, the District of  Columbia, and the U.S. territories and associated jurisdictions.
The Ryan White Comprehensive AIDS Resources Emergency Act of 1990  (CARE Act), administered by the Department of Health and Human  Services’s (HHS) Health Resources and Services Administration (HRSA),  was enacted to address the needs of jurisdictions, health care providers,  and people with HIV/AIDS and their family members. Each year CARE  Act programs provide assistance to over 530,000 mostly low-incom underinsured, or uninsured individuals living with HIV/AIDS. Under the  CARE Act, approximately $2.2 billion in grants were made in fiscal year  2009. CARE Act programs have been reauthorized three times (1996, 2000,  and 2006) and are scheduled to be reauthorized again in 2009.
The Ryan White HIV/AIDS Treatment Modernization Act of 2006 (RWTMA)  reauthorized CARE Act programs for fiscal year 2007 through fiscal year  2009, including grants for jurisdictions through Part A and Part B. Part A  of the CARE Act provides for grants to selected metropolitan areas— known as eligible metropolitan areas (EMA) and transitional grant areas  (TGA)—that have been disproportionately affected by the HIV/AIDS  epidemic. Most CARE Act funding is distributed either as base or  supplemental grants. Base grants are distributed by formula.  Supplemental grants are generally awarded through a competitive process  based on the demonstration of severe need and other criteria. Base grants  for EMAs, but not TGAs, are protected by a hold-harmless provision that  protects grantees’ funding at specified levels. Base grants for EMAs are  distributed among grantees according to each grantee’s share of HIV/AIDS  cases among all EMAs resulting in equal funding per case for all grantees.  After the preliminary funding level for an EMA is calculated based on its  percentage of HIV/AIDS cases, the amount is compared to the funding  levels guaranteed by the hold-harmless provision. If the preliminary  funding level is less than the guaranteed amount, the base grant is  increased to the guaranteed amount and results in funding not being  distributed equally per case. The funds used to meet the EMA hold- harmless requirement are deducted from the funds that would otherwise  be available to EMAs and TGAs as supplemental grants before these grants  are awarded. Part B provides for grants to states, the District of Columbia,  and U.S. territories and associated jurisdictions to improve quality,  availability, and organization of HIV/AIDS services.
RWTMA required that, beginning in fiscal year 2007, CARE Act Part A and  Part B formula funding be based on the number of living HIV and AIDS  cases in a grantee’s jurisdiction. Previously, formula funding was based  solely on the number of living AIDS cases reported in that jurisdiction.  CDC provides HRSA with the number of living name-based HIV/AIDS  cases in each jurisdiction and HRSA uses these counts to determine CARE  Act Part A and Part B formula funding. While prior to RWTMA all  grantees collected AIDS counts by name, not all grantees collected HIV  counts by name. Instead, some collected HIV counts by code; that is, using a coded identifier. Code-based case counts are not accepted by CDC  because CDC does not consider them to be accurate and reliable,  primarily because they include duplicate case counts.  RWTMA required  Part B grantees to report name-based HIV case counts to be used by HRS when determining the amount of base grants. However, RWTMA  provided for a transition period from a code-based to a name-based  system. States without an accurate and reliable name-based HIV reportingsystem are exempt from the name-based reporting requirement if they can  show specified progress toward such reporting. RWTMA provided for such  an exemption through 2009, the period for which it reauthorized CARE Ac programs.
Another change in RWTMA concerned the obligation of funds by Part A  and Part B grantees. In the past, some CARE Act grantees did not obligate  all of their funds in some years, while others obligated all of their funds.  RWTMA provided that base and supplemental grant funds were available  for obligation by the grantee for a 1-year period beginning on the date  awarded funds first became available to the grantee (i.e., the grant year). It  also required HRSA to cancel any unobligated balances at the end of the  grant year, recover funds that had been disbursed to grantees, and  redistribute these funds to grantees in need as supplemental grants.  These RWTMA unobligated balance provisions apply to base and  supplemental grants under Parts A and B.
As Congress prepares to reauthorize CARE Act programs, you asked us to  examine how various elements of the law affect CARE Act awards. In this  report, we provide information on (1) how many Part B grantees had  HRSA use their name-based HIV case counts to determine fiscal year 2009  CARE Act formula funding and how many Part B grantees are collecting  name-based HIV case counts in their reporting systems; (2) the  distribution of CARE Act hold-harmless funding among EMAs and the  extent of funding differences per case in EMAs in fiscal years 2009 and  2004 resulting from hold-harmless provisions; and (3) the reductions in  Part A and Part B grantees’ funding due to the RWTMA unobligated  balance provisions based on grantees’ unobligated balances at the end of  grant year 2007.
To examine how many Part B grantees had HRSA use their name-based  HIV case counts to determine fiscal year 2009 CARE Act formula funding  and how many Part B grantees are collecting name-based HIV case counts  in their reporting systems, we obtained and reviewed data from CDC and  HRSA on the number of Part B grantees that have such systems and the  dates they began collecting name-based HIV case counts. We also obtained  data from CDC and HRSA on which grantees had name-based HIV  reporting systems used to generate the case counts for determining CARE  Act formula funding. We reviewed published information on HIV reporting  systems. We also reviewed descriptions of steps CDC and HRSA are taking  to help grantees convert to a name-based reporting system. We  interviewed CDC and HRSA officials knowledgeable about the data  reporting practices of grantees and the use of these data for CARE Act  funding. We also interviewed officials from the National Alliance of State  and Territorial AIDS Directors, the Kaiser Family Foundation, and other  organizations.
To examine the distribution of CARE Act Part A hold-harmless funding  among EMAs and determine the extent of formula funding differences per  case in fiscal years 2009 and 2004 resulting from hold-harmless provisions,  we obtained and reviewed data from HRSA on Part A grants for fiscal year  2009. We reviewed the amount of funding distributed to each EMA based  on its share of HIV/AIDS cases, amount of hold-harmless funding for each  EMA, and HIV/AIDS case counts used by HRSA to determine fiscal year  2009 funding. We compared the funding per HIV/AIDS case received by  each EMA to determine whether funding departs from equal funding per  case. We also determined the effect of the hold-harmless provision on each  EMA by comparing funding with the hold-harmless provision in place to  what it would be without the hold-harmless provision in place. To  determine how the distribution of hold-harmless funding and funding  differences per case have changed over time, we compared EMAs’ funding  for fiscal year 2009 to fiscal year 2004 funding. We chose fiscal year 2004  because we reported on 2004 in an earlier study and because it preceded  RWTMA in 2006. We interviewed HRSA officials knowledgeable about  Part A grants and the funding formula. We reviewed the data and asked  HRSA officials follow-up questions about the hold-harmless provision and  funding calculations, and determined that the data were sufficiently  reliable for our purposes.
To determine the reductions in Part A and Part B grantees’ funding due to  the RWTMA unobligated balance provisions, we reviewed HRSA  documentation on grantees’ unobligated balances at the end of the 2007  grant year. We also reviewed the effect of these 2007 balances on grantees’  funding for fiscal year 2009. We interviewed HRSA officials and others  knowledgeable about the unobligated balance provisions. We also  interviewed 6 Part A grantees and 13 Part B grantees, which we chose  based on their geographic location, number of HIV/AIDS cases, whether  the grantee had an unobligated balance over 2 percent at the end of the  2007 grant year, and how the grantee purchases drugs for its clients with  HIV/AIDS. We reviewed the data provided by HRSA and asked follow-up  questions related to the calculation of unobligated balances, and  determined that the data were sufficiently reliable for our purposes.
We conducted this performance audit from April 2009 through September  2009 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: CARE Act base grants are distributed through a formula that includes  HIV/AIDS case counts. Through its HIV/AIDS surveillance system, CDC  receives case counts from states, the District of Columbia, and U.S.  territories and associated jurisdictions. CDC provides these case counts  to HRSA so that HRSA may determine CARE Act formula grant amounts.  In fiscal year 2009, HRSA distributed approximately $410 million by  formula under Part A of the CARE Act and about $1.1 billion by formula  under Part B.
Fifty-six metropolitan areas received Part A funds in fiscal year 2009.  Twenty-four of the metropolitan areas were classified by HRSA as EMAs  and 32 as TGAs. For fiscal years 2008 and 2009, the hold-harmless  provision provided that an EMA receive at least 100 percent of the amount  it had received as its base grant, including hold harmless funding, for fiscal  year 2007.
Part B of the CARE Act provides funds to all 50 states, the District of  Columbia, the Commonwealth of Puerto Rico, Guam, the U.S. Virgin  Islands, and 5 other territories and associated jurisdictions. Part B grants  include grants for HIV/AIDS services that are awarded by formula, AIDS  Drug Assistance Program (ADAP) grants that are awarded by formula,  emerging community grants that are awarded by formula for HIV/AIDS  services, Part B supplemental grants for HIV/AIDS services, and ADAP  supplemental grants. RWTMA contained a hold-harmless provision that  protects funding for Part B base grants and ADAP base grants. For fiscal  years 2008 and 2009, a grantee’s total Part B base and ADAP base grants  would be at least 100 percent of the total of such grants in fiscal year 2007.
One condition of an ADAP grant is that grantees use every means at their  disposal to secure the best price available for all products on their  formularies. Best prices are determined by the prices that can be obtained  under the 340B drug pricing program. Generally, an ADAP purchasing  drugs through the 340B program can use a direct purchasing option or  rebate option. Under the 340B direct purchase option, ADAPs purchase  drugs from drug manufacturers or through a third-party such as a drug  purchasing agent. Using the 340B direct purchase option, ADAPs receive  the 340B price discount up front. Under the rebate option, ADAPs typically  contract with entities such as a pharmacy network or pharmacy benefits  manager for purchase of covered drugs. ADAPs later request a rebate  consistent with the section 340B price from the drug manufacturers.
Due to RWTMA’s requirement that CARE Act formula funding be  determined by using name-based HIV/AIDS counts, grantees collecting HIV  case counts by code must transition to such a reporting system. Although  all grantees had name-based AIDS reporting systems, at the time of  RWTMA seven grantees still used code-based HIV reporting systems, while  17 others had recently transitioned to a name-based HIV reporting  system. It can take several years to transition to a name-based system  because grantees must identify by name each case originally reported by  code and then enter each case into the new, name-based reporting system.  During the transition period from a code-based to a name-based system, a  grantee can report its code-based HIV counts directly to HRSA and have  these counts used to determine funding for fiscal years 2007 through 2009.  However, in accordance with RWTMA, for each grantee relying on a code- based system, HRSA made a 5 percent reduction in the number of living  HIV cases to adjust for potential duplicate reporting in systems that collect  code-based case counts, thus reducing the award. RWTMA allowed the use  of code-based HIV case counts through fiscal year 2009; it also provided  that the status of a grantee under RWTMA for purposes of the transition  period may not be considered after fiscal year 2009. Grantees that are  transitioning to a name-based HIV reporting system determine when their  name-based counts will be used by HRSA to calculate CARE Act formula  funding. If the exemption permitting code-based reporting is not extended,  it is likely that future fiscal year funding will be based exclusively on  name-based counts. A grantee that had not completed the transition from  code- to name-based case counts could face a reduction in funding  because its name-based HIV reporting system could contain fewer cases  than its code-based system.
Once a grantee has transitioned to a name-based HIV reporting system, its  system must be determined to be operational, as well as accurate and  reliable, in order for a grantee’s name-based case counts to be used for  funding purposes. To be operational, CDC, in consultation with the  grantee’s HIV/AIDS surveillance program and epidemiologist, considers  several factors, such as the grantee’s process for ensuring HIV-positive  individuals are only counted once and the number of providers and  laboratories within the grantee’s jurisdiction diagnosing and reporting HIV  positive diagnoses to the grantee. The date CDC allows grantees to report  name-based HIV cases to it is considered the date the reporting system  becomes operational. Once the name-based HIV reporting system is  declared operational, a grantee can determine that its reporting system is  accurate and reliable (i.e., its case counts are complete), and can elect to  have CDC send HRSA its name-based case counts to determine CARE Act  formula funding. A grantee may declare its system to be accurate and  reliable anytime after the system has been determined to be operational.  However, regardless of the grantee’s assessment, CDC considers a HIV  reporting system to be accurate and reliable no later than 4 years after the  grantee began collecting name-based HIV case counts. After a grantee  determines that its system is accurate and reliable, or after the 4-year  period, CDC transmits the HIV case counts to HRSA to be used in the  funding formulas.
RWTMA required HRSA to cancel funds from grantees’ awards that are  unobligated at the end of the grant year, recover funds that had been  disbursed, and redistribute these funds to other grantees. These  unobligated balance provisions apply to base and supplemental grant  awards under Parts A and B. For 2007 grants, HRSA required grantees to  estimate and report their unobligated balance to HRSA 60 days prior to the  end of the grant year. Grantees were also required to submit a Financial  Status Report (FSR) to HRSA 90 days after the grant year ends. Grantees  must report their actual unobligated balance on the FSR and the  unobligated balance can be updated by the grantee for up to 6 months  after the FSR is due. Unobligated balances of grant awards are canceled  (with disbursed funds recovered) and then redistributed to grantees who  apply for them as additional amounts for supplemental grants under Part A  and Part B in the next fiscal year after the unobligated funds were  reported.
For base grant funds, the impact of unobligated balances differs based on  whether the unobligated amount is more than 2 percent of the grant. All  unobligated base grant funds must be canceled and recovered by HRSA if  the grantee has not been granted a carryover waiver. HRSA takes this  step following receipt of the FSR. In addition to having unobligated funds  canceled and recovered unless a carryover waiver is granted, grantees  with unobligated Part A, Part B, and ADAP base grant funds in excess of   2 percent of the grant award incur a penalty—a corresponding reduction  in grant funds for the first fiscal year beginning after the fiscal year in  which the Secretary receives the FSR. Grantees are assessed the  reduction even if they were granted a waiver. Because FSRs are submitted  90 days after the grant year ends, grants for the next year have already  been made by the time HRSA has received the information necessary to  determine which grantees have an unobligated balance greater than   2 percent. As a result, there is a 1 year lag time between when the  unobligated balance occurs and when the penalty is assessed. For  example, if a grantee had an unobligated balance of 3 percent in grant year  2007, the grantee’s FSR would have been filed in grant year 2008, and the  dollar amount of the 2007 unobligated balance would have been deducted  from the grantee’s award in grant year 2009. Figure 1 shows such a time  line for 2007 Part B grant distribution and the unobligated balance  provisions.
In addition, grantees with unobligated balances of greater than 2 percent  of Part A or Part B base grants are ineligible to receive supplemental  grants for the year in which the reduction takes place. For Part A grantees  this means that they are not eligible to receive Part A supplemental grants.  For Part B base grantees this results in ineligibility to receive Part B  supplemental grants. For Part B ADAP grantees, an unobligated balance of  greater than 2 percent does not result in ineligibility for ADAP  supplemental grants. Instead, ineligibility for the ADAP supplemental grant  is based on a grantee not obligating at least 75 percent of its entire Part B  grant award within 120 days. Table 1 lists the triggers and penalties for  the unobligated balance provisions.
section_title: Not All Grantees Had HRSA Use Their Name-Based HIV Case Counts for Fiscal Year 2009 Formula Funding, but Most Part B Grantees Are Collecting Name- Based HIV Case Counts in Their Reporting Systems
paragraphs: Most Part B grantees were collecting name-based HIV case counts in their  reporting systems as of December 31, 2007, but not all grantees had HRSA  use these case counts to determine fiscal year 2009 CARE Act funding.  For 47 of the 59 Part B grantees, HRSA used name-based HIV case counts,  as provided by CDC, to determine CARE Act funding. The remaining 12  grantees had HRSA use their code-based HIV case counts to determine  fiscal year 2009 CARE Act funding. Seven of the 12 grantees—California,  the District of Columbia, Illinois, Maryland, Massachusetts, Oregon, and  Rhode Island—were collecting name-based HIV case counts as of  December 31, 2007, but submitted their code-based case counts to HRSA  to determine CARE Act funding. Five of the 12 grantees—Hawaii,  Vermont, the Federated States of Micronesia, Palau, and the Republic of  the Marshall Islands—were not collecting name-based case counts as of  December 31, 2007. Table 2 lists the 12 grantees for which code-based  HIV case counts were used for fiscal year 2009 CARE Act formula funding,  and the month and year that they began collecting name-based case  counts. Each of these 12 grantees could require 4 years from the date they  began collecting name-based HIV case counts for their name-based HIV  reporting systems to be considered accurate and reliable. However,  grantees can determine that their reporting systems are accurate and  reliable in less than 4 years.
Although 56 of the 59 Part B grantees are currently collecting name-based  HIV case counts, some grantees could face a reduction in fiscal year 2010  funding if HRSA uses these counts to determine fiscal year 2010 funding.  RWTMA allows grantees to submit code-based case counts to HRSA to  determine funding for fiscal years 2007 through 2009; without an extension  as part of the upcoming reauthorization, it is likely that HRSA would  determine CARE Act funding for fiscal year 2010 using name-based case  counts collected through December 2008. However, this could be  problematic for some grantees. For example, as of December 2008,  Vermont had only been collecting name-based case counts for 8 months. If  Vermont’s system is not considered to be accurate and reliable—which  could take up to 4 years—but its December 2008 name-based case count is  nevertheless used to determine fiscal year 2010 funding, Vermont may not  actually receive funding commensurate with the number of HIV/AIDS  cases in the state, which is the intended basis for the formula grant.  Further, its funding may be a reduction from what it received for fiscal  year 2009.
CDC has provided assistance for grantees transitioning from a code-based  to a name-based HIV reporting system. CDC has provided grantees with  technical assistance materials, ongoing assistance via conference calls,  and additional assistance upon request. According to CDC, the District of  Columbia and Massachusetts were the only Part B grantees that requested  additional assistance in transitioning to a name-based system. CDC and  HRSA plan to meet with grantee officials from the Federated States of  Micronesia, Palau, and the Republic of the Marshall Islands to discuss HIV  reporting.
section_title: Hold-Harmless Funding Was More Widely Distributed among EMAs in Fiscal Year 2009 Than in Fiscal Year 2004, but the Range of Funding Differences per Case Decreased
paragraphs: Part A hold-harmless funding was more widely distributed among EMAs in  fiscal year 2009 than in fiscal year 2004. A larger percentage of EMAs  qualified for hold-harmless funding in fiscal year 2009 than in fiscal year  2004, the last year for which we reported this information. About   71 percent of EMAs received hold-harmless funding in fiscal year 2009,  while 41 percent received hold-harmless funding in fiscal year 2004.  Furthermore, the percentage of the total hold-harmless funding received  by the EMA with the most hold-harmless funding was smaller in fiscal year  2009 than in fiscal year 2004. In fiscal year 2009, New York received   52.7 percent of the hold-harmless funding, while in fiscal year 2004, San  Francisco received 91.6 percent of the hold-harmless funding. In addition  to hold-harmless funding being more widely distributed in fiscal year 2009  than in fiscal year 2004, the total amount of hold-harmless funding  provided to EMAs was larger in fiscal year 2009 than in fiscal year 2004. In  fiscal year 2009, $24,836,500 in hold-harmless funding was distributed  compared to $8,033,563 in fiscal year 2004. Table 3 lists the EMAs and  their base grant and hold-harmless funding in fiscal years 2009 and 2004.
The range of CARE Act funding differences among EMAs, as measured by  funding per case, was smaller in 2009 than in 2004. In fiscal year 2009,  EMA base funding per case ranged from $645 to $854, a range of $209. In  fiscal year 2004, the funding per case ranged from $1,221 to $2,241, a range  of $1,020. The smaller funding range resulted from San Francisco receiving  less hold-harmless funding in fiscal year 2009 than in fiscal year 2004. In  both years, San Francisco received the most hold-harmless funding per  case. However, in fiscal year 2009, San Francisco received $208 in hold- harmless funding per case, while in fiscal year 2004 it received $1,020 in  hold-harmless funding per case. Table 4 lists the 24 EMAs and their base  grant and hold-harmless funding per case in fiscal years 2009 and 2004.
Hold-harmless funding accounted for a larger percentage of San  Francisco’s total base funding than it did for any other EMA in fiscal years  2009 and 2004, but the percentage was smaller in fiscal year 2009 than in  fiscal year 2004. In fiscal year 2004, hold-harmless funding accounted for  approximately 46 percent of San Francisco’s base grant while in fiscal year  2009 hold-harmless funding accounted for approximately 24 percent of  San Francisco’s base grant. Table 5 lists the 24 EMAs and their hold- harmless funding as a percent of their base grants in fiscal years 2009 and  2004.
In some cases, hold-harmless funding in fiscal year 2009 accounted for a  significant portion of a grantee’s Part A base funding. For example, San  Francisco, which received the most hold-harmless funding per HIV/AIDS  case in fiscal year 2009, received a total of $14,672,553 in base funding. Of  this amount, $3,571,649 or 24.3 percent was due to the hold-harmless  provision. Because of its hold-harmless funding, San Francisco, which had  17,173 HIV/AIDS cases, received a base grant equivalent to what an EMA  with approximately 22,713 HIV/AIDS cases (32 percent more) would have  received without hold-harmless funding.
A significant portion of the differences in funding per case between San  Francisco and the other EMAs results from how the San Francisco case  counts are determined. The San Francisco EMA continues to be the only  metropolitan area whose formula funding is based on both living and  deceased AIDS cases. In February 2006 and October 2007, we reported  that the San Francisco EMA was the only EMA still receiving CARE Act  formula funding based on the number of living and deceased cases in a  metropolitan area. All other EMAs received formula funding based on an  estimate of the number of living cases. We showed that the fiscal year 2004  CARE Act formula funding for the San Francisco EMA was determined in  part with reference to its fiscal year 1995 funding, which was based on  both living and deceased AIDS cases. Because the San Francisco EMA also  received hold-harmless funding in fiscal years 2005, 2006, 2007, and 2009,  its fiscal year 2009 CARE Act formula funding continues to be based, in  part, on the number of deceased cases in the San Francisco EMA as of  1995. Hold-harmless funding for other EMAs does not trace back to 1995  or earlier, a period when CARE Act funding was based on cumulative  counts of AIDS cases, both living and deceased.
If there had been no hold-harmless provision in fiscal year 2009, most  grantees would have received more funding in fiscal year 2009 than they  did. Seventeen of the 24 EMAs would have received more funding if there  had been no hold-harmless provision and if the $24.8 million that was used  for hold-harmless funding had instead been distributed across all EMAs as  supplemental grants, that is, in the same proportions as the supplemental  grants. The funds used to meet the EMA hold-harmless requirement are  deducted from the funds that would otherwise be available for  supplemental grants before these grants are awarded. As a consequence,  the pool of funds for supplemental grants is reduced by the amount of  funding needed to meet the hold-harmless provision. Although 17 EMAs  received hold-harmless funding in fiscal year 2009, only 7 (New York, San  Francisco, San Juan, West Palm Beach, Newark, New Haven, and Nassau- Suffolk) received more funding because of the hold-harmless provision  than they would have received through supplemental grants in the absence  of the hold-harmless provision.
section_title: Sixteen Grantees Had Reductions in Their 2009 Grants Due to Their Unobligated Part B Balances at the End of Grant Year 2007
paragraphs: Sixteen Part B grantees received reduced funding in grant year 2009  because they had unobligated balances over 2 percent in grant year 2007.  Grantees we interviewed provided reasons why it is difficult to obligate all  but 2 percent of their grant award. Grantees and HRSA said that drug  rebates complicate grantees’ efforts to obligate grant funds.
subsections: section_title: Sixteen Part B Grantees Were Assessed Penalties Under the RWTMA Unobligated Balance Provisions Because They Had Unobligated Balances over 2 Percent
paragraphs: Nine states and seven territories and associated jurisdictions were  assessed penalties in grant year 2009 because they had unobligated  balances over 2 percent in grant year 2007. Arizona, Arkansas, Colorado,  Delaware, Idaho, Maine, Nebraska, Ohio, and Pennsylvania were all  assessed penalties along with seven of the U.S. territories and associated  jurisdictions (American Samoa, Commonwealth of the Northern Mariana  Islands, the Federated States of Micronesia, Guam, Palau, the Republic of  Marshall Islands, and the U.S. Virgin Islands). Table 6 shows the Part B  grant year 2007 unobligated balances. No Part A grantees had unobligated  balances over 2 percent.
To establish if an unobligated balance penalty applied to a grantee’s 2009  grant, HRSA summed the Part B base and ADAP base unobligated  balances to determine if the total was more than 2 percent of the grantee’s  total award (Part B base and ADAP base) for grant year 2007. As the  provisions were applied by HRSA, Part B grantees can incur a penalty in  both their Part B base and ADAP base grants even if the unobligated  balance for one of these grants is less than 2 percent as long as the sum of  the Part B base and ADAP base balances is greater than 2 percent. HRSA  assesses unobligated balance penalties based on the sum of the Part B  base and ADAP base unobligated balances. For example, in grant year  2007 Maine had an unobligated balance of more than 2 percent in its ADAP  base grant but less than 2 percent in its Part B base grant. The total  unobligated funding was 2.4 percent. Because the total was above   2 percent, HRSA reduced both the Part B base and ADAP base grants in  grant year 2009.
While 16 Part B grantees incurred unobligated balance penalties, some  incurred penalties in both their Part B base grants and ADAP base grants  and others only had penalties in their Part B base grants because they did  not have unobligated ADAP balances. In grant year 2009, six states and  one territory were assessed penalties in both their Part B base and ADAP  base grants. Because penalties apply to both base grants only when  grantees have unobligated balances in both grants, three states and six  territories and associated jurisdictions had penalties assessed only on  their Part B base grants, because they did not have unobligated ADAP base  balances. Part B base funding penalties ranged from $6,433 in Palau to  $1,493,935 in Ohio. (See table 7.) ADAP base funding penalties ranged  from $26,233 in Maine to $12,670,248 in Pennsylvania. (See table 8.)  Pennsylvania’s ADAP base grant penalty accounted for 84 percent of the  total amount of penalties for unobligated ADAP funds levied on 2009  grants.
In order to calculate the final Part B base and ADAP base grant awards,  the penalty attributable to an unobligated balance is applied after other  calculations are made, including hold harmless funding. If hold-harmless  funds were added after the unobligated balance penalties were applied,  hold-harmless funds would negate the effect of the unobligated balance  penalties because they would increase funding. For example, Colorado  had a preliminary 2009 Part B base grant award of $3,666,928. Under the  hold-harmless provision in RWTMA, Colorado was guaranteed Part B base  grant funding of $3,683,544. Application of the RWTMA unobligated  balance provision reduced the amount of its Part B base grant award (after  the addition of hold harmless funding) by $734,240, leaving Colorado with  a final Part B base grant award of $3,099,404. In comparison, if hold- harmless funding had been added after the application of the unobligated  balance penalty, Colorado would have received $3,683,544, the same as if  it had incurred no unobligated balance penalty.
section_title: Grantees Provided Reasons Why Obligating All but 2 Percent of Their Grant Awards Is Difficult
paragraphs: Five of the 13 Part B grantees we interviewed had unobligated balances  over 2 percent; these 5 grantees told us that they had varying reasons for  their unobligated balances, some of which they said were beyond their  control. For example, Arizona explained that it had an unobligated balance  from its ADAP base grant, in part, because it had a dispute with a vendor it  had contracted with to provide prescription drugs to clients. The vendor  claimed that it had not been paid for services. According to state officials,  to settle the dispute and comply with applicable state rules Arizona had to  pay the vendor twice. When the vendor realized that it had been overpaid,  it reimbursed Arizona in the amount of $670,000. Arizona received the  reimbursement at the end of the grant year. Arizona was unable to spend  this amount, leaving it with an unobligated balance of over 2 percent and a  subsequent penalty.
Grantees we interviewed, which included those that had unobligated  balances of over 2 percent and those that did not, explained that they  experienced difficulty obligating grant funds within the grant year. Three  of the 13 Part B grantees we interviewed explained that they are currently  dealing with economic factors such as state hiring freezes, spending caps,  and furloughs of staff. One grantee explained that because of economic  difficulties, his state has implemented new procedures as a means to limit  state spending, including reclaiming state funding balances that are not  spent quickly. Because of this new procedure, the grantee must allocate  state funding, federal funding, and program income simultaneously, which  he finds difficult. One grantee said the existence of the state hiring freeze  has limited the amount of grant funding that could be obligated to fund  staff positions. The grantee stated that the hiring freeze has been  implemented as a means to limit state spending, but the state has imposed  the hiring freeze on all programs, including those that receive federal  funds.
One Part B grantee explained that, while the grantee can to some extent  control the contracts that are entered into and types of services that are  provided, the grantee cannot control factors that affect the demand for  program services. For example, the grantee cannot control the number of  people who become infected; those who will lose their jobs and private  health insurance and need to receive services supported with grant funds;  and changes that occur with Medicaid and Medicare that can affect clients.  Additionally, two grantees stated that because the grant awards can arrive  after April 1, it can be helpful to carry over funds from the previous year’s  grant award so that they can award contracts, rather than delay them until  HRSA awards grant funds. These grantees said that they would like to be  able to carry over funds without risking a reduction in future funding.
One grantee explained that because grant awards are based on a formula  and can fluctuate from year to year, it is helpful for the grantee to have  funding on hand to maintain consistent service levels even if formula  funding is decreased without risking a penalty. Six grantees expressed  concern that the level of oversight required to obligate all but 2 percent of  their grants leaves them unable to deal with unpredictable situations, such  as a contractor going out of business. Six of the 13 grantees we  interviewed said that they consider the 2 percent threshold too low, and  some suggested that a 5 percent threshold would be more reasonable. Two  of these grantees told us that if grantees had to obligate all but 5 percent of  their funding, they would have more room to manage their budgets.  However, only 2 of the 16 Part B grantees that received penalties for  unobligated balances had unobligated balances of less than 5 percent.
section_title: Grantees and HRSA Said Drug Rebates Make It Difficult for Grantees to Obligate Grant Funds
paragraphs: According to information provided by HRSA, 7 of the 13 Part B grantees  we interviewed received drug rebates. In addition, Delaware informed us  that they also receive rebates. Four of the eight grantees that received  rebates said that the requirement that they spend drug rebates before  spending grant funds makes it more difficult for them to obligate all but   2 percent of their grant awards, even though drug rebates are not subject  to the unobligated balance provisions. The 27 Part B grantees that  exclusively use the federal 340B rebate option to purchase their ADAP  drugs typically contract with pharmacy networks or pharmacy benefit  managers for the purchase of covered drugs who then request rebates  from the pharmaceutical companies in order to obtain the 340B drug price  and pass these savings on to the grantee. Under RWTMA, drug rebates that  grantees receive are not considered part of the grant award and are not  subject to the unobligated balance provisions. However, federal  regulations generally applicable to state and local government grantees  require them to disburse rebates (along with program income and certain  other amounts) before requesting additional cash payments. Accordingly,  HRSA requires rebates to be spent before grantees obligate additional  grant funds. Thus, grantees receiving drug rebates must prioritize spending  these funds and several grantees said that this makes it more difficult to  obligate grant funds in the grant year.
While only three of the nine states that had a reduction in their ADAP base  grants for grant year 2009 due to an unobligated balance received rebates,  five of the eight grantees we interviewed that received rebates expressed  concern about the requirement that drug rebate funds be spent before  grant funds. One grantee explained that though it did not have an  unobligated balance for grant year 2007, it took a great deal of effort to  avoid one. Before RWTMA and the budget challenges in this state, this  grantee saved state funds to spend at the end of the grant year so it could  ensure that Part B funds were obligated and rebate funds were spent.  However, because of state spending requirements put in place due to  economic factors this state is currently facing, the grantee can no longer  do this. In addition, spending rebates first can be difficult because rebate  states often do not know when they will receive rebates; the state may  send out requests every quarter, but may not receive the rebates until well  into the next quarter or grant year. Rebate states may also not know the  rebate amount beyond what they can estimate based on trends over the  past year. Several grantees said that because of the variability of the rebate  amounts and their timing, they could receive a large rebate check late in  the year. They then could have unobligated balances of grant funds of  greater than 2 percent at that time because they use the rebate amounts  when they become available rather than grant funds.
Pennsylvania had an unobligated ADAP base grant balance of $12,670,248  in grant year 2007, and state officials said that a large part of the reason  was its ADAP drug rebates. In grant year 2007, Pennsylvania received   $11 million in rebates. These rebate funds had to be spent before it could  obligate its ADAP base funding for grant year 2007. According to  Pennsylvania officials, the Pennsylvania grantee has an administrative  structure that only allows it to spend its rebates on the purchase of drugs,  limiting how it could spend its rebate funds. Other states we spoke to can  use rebate funds to provide Part B medical services as well, providing  them with greater flexibility in spending these funds. Pennsylvania  officials told us that they also had an unobligated balance of its ADAP base  grant of over $2.4 million in grant year 2008. The Pennsylvania state  government is working to revise its current structure.
HRSA sought to address the interaction between drug rebate funds and the  RWTMA unobligated balance provisions by requesting from HHS  permission to seek an exemption from the regulation for grantees from the  Office of Management and Budget. HRSA told us that requiring ADAP  rebate funds to be spent before grant funds increases the risk of  unobligated balance penalties, and that the loss of grant funding and  ineligibility for supplemental funding can pose difficulties for grantees.  HRSA requested permission to seek an exemption from the otherwise  applicable federal regulations for drug rebate states from HHS. HRSA  believes the unobligated balance requirements were intended to ensure  that federal funds are spent promptly, not to create a mechanism through  which federal grants would be reduced. However, HRSA’s request for  permission to seek an exemption for drug rebate states was denied by  HHS in November 2007. HHS stated that while federal regulations and the  unobligated balance provisions create significant challenges for rebate  states, the justification HRSA presented for the class deviation was “not  compelling.”
section_title: Agency Comments
paragraphs: HHS provided technical comments on a draft of the report, which we  incorporated as appropriate.
We are sending copies of this report to the Secretary of Health and Human  Services. The report is also available at no charge on GAO’s Web site at  http://www.gao.gov.
If you or your staffs have any questions, please contact me at (202) 512- 7114 or crossem@gao.gov. Contact points for our Offices of Congressional  Relations and Public Affairs may found on the last page of this report.  Other staff who made major contributions to this report are listed in  appendix I.
section_title: Appendix I: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the contact above, Thomas Conahan, Assistant Director;  Robert Copeland, Assistant Director; Leonard Brown; Romonda McKinney  Bumpus; Cathleen Hamann; Sarah Resavy; Rachel Svoboda; and Jennifer  Whitworth made key contributions to this report.