Medicaid: Intergovernmental Transfers Have Facilitated State Financing Schemes
Published: 2004-03-18T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Medicaid, the federal-state health financing program for many of the nation's most vulnerable populations, finances health care for an estimated 53 million lowincome Americans, at a cost of $244 billion in 2002. Congress structured Medicaid as a shared fiduciary responsibility of the federal government and the states, with the federal share of each state's Medicaid payments determined by a formula specified by law. In 2002, the federal share of each state's expenditures ranged from 50 to 76 percent under this formula; in the aggregate, the federal share of total Medicaid expenditures was 57 percent. Some states have used a number of creative financing schemes that take advantage of statutory and regulatory loopholes to claim excessive federal matching payments. GAO was asked to summarize prior work on how some of these schemes operated, including the role of intergovernmental transfers (IGT), which enable government entities--such as the state and local-government facilities like county nursing homes--to transfer funds among themselves. GAO was also asked to discuss these schemes' effects on the federalstate Medicaid partnership and to discuss what can be done to curtail them.
section_title: What GAO Found
paragraphs: For many years states have used varied financing schemes, sometimes involving IGTs, to inappropriately increase federal Medicaid matching payments. Some states, for example, receive federal matching funds on the basis of large Medicaid payments to certain providers, such as nursing homes operated by local governments, which greatly exceed established Medicaid rates. In reality, the large payments are often temporary, since states can require the local-government providers to return all or most of the money to the states. States can use these funds--which essentially make a round-trip from the states to providers and back to the states--at their own discretion. States' financing schemes undermine the federal-state Medicaid partnership, as well as the program's fiscal integrity, in at least three ways. The schemes effectively increase the federal matching rate established under federal law by increasing federal expenditures while state contributions remain unchanged or even decrease. GAO estimated that one state effectively increased the federal matching share of its total Medicaid expenditures from 59 percent to 68 percent in state fiscal year 2001, by obtaining excessive federal funds and using these as the state's share of other Medicaid expenditures. There is no assurance that these increased federal matching payments are used for Medicaid services, since states use funds returned to them via these schemes at their own discretion. In examining how six states with large schemes used the federal funds they generated, GAO found that one state used the funds to help finance its education programs, and others deposited the funds into state general funds or other special state accounts that could be used for non-Medicaid purposes or to supplant the states' share of other Medicaid expenditures. The schemes enable states to pay a few public providers amounts that well exceed the costs of services provided, which is inconsistent with the statutory requirement that states ensure economical and efficient Medicaid payments. In one state, GAO found that the state's proposed scheme increased the daily federal payment per Medicaid resident from $53 to $670 in six local-government-operated nursing homes. Although Congress and the Centers for Medicare & Medicaid Services have acted to curtail financing schemes when detected, problems persist. States can still claim excessive federal matching funds for payments exceeding public facilities' actual costs. GAO suggests that Congress consider a recommendation open from prior work, that is, to prohibit Medicaid payments that exceed actual costs for any government-owned facility.

section_title: Letter
paragraphs: I am pleased to be here today as you explore the issue of states’ use of  intergovernmental transfers in the federal-state Medicaid program.  Medicaid finances health care for an estimated 53 million low-income  Americans at a cost of $244 billion. Medicaid is the third-largest  mandatory spending program in the federal budget and one of the largest  components of state budgets, second only to education. The program  fulfills a crucial national role by providing health coverage for a variety of  vulnerable populations, including low-income families with children and  certain people who are elderly, blind, or disabled. Congress has structured  Medicaid as a shared responsibility of the federal government and the  states, with the federal share of each state’s Medicaid payments  determined by a formula specified by law. The Centers for Medicare &  Medicaid Services (CMS), within the Department of Health and Human  Services (HHS), is the federal agency responsible for the program, and the  states design and administer their programs with considerable discretion  and flexibility.
For more than a decade, states have used a number of creative financing  schemes to inappropriately increase the federal share of Medicaid  expenditures. Intergovernmental transfers, or IGTs, are one of the tools  that have enabled them to do so. State and local governments use IGTs to  carry out their shared governmental functions, such as collecting and  redistributing revenues to provide essential government services. But by  using IGTs, states can also transfer funds to or from local-government  entities, such as government-owned nursing homes, as part of complex  financing schemes that inappropriately boost the federal share of Medicaid  costs. In my testimony today, I will (1) describe how some state financing  schemes have operated, including the role of IGTs in these schemes;   (2) discuss how such financing schemes compromise the federal-state  partnership that is the foundation of the Medicaid program; and   (3) discuss what can be done to further curtail state financing schemes.  My testimony today is based on our prior work assessing state financing  schemes and federal oversight of them. We conducted this body of work  from June 1993 through January 2004 in accordance with generally  accepted government auditing standards.
In summary, for many years states have used varied financing schemes,  sometimes involving IGTs, to inappropriately increase federal matching  payments. Taking advantage of statutory and regulatory loopholes, some  states, for example, have made large Medicaid payments to certain  providers, such as nursing homes operated by local governments, which  have greatly exceeded the established Medicaid payment rate. These state  expenditures would enable states to claim large federal matching  payments. Such transactions create the illusion of valid expenditures for  services delivered by local-government providers to Medicaid-eligible  individuals. In reality, the spending is often only temporary because states  require the local governments to return all or most of the money to the  states through IGTs. Once states receive the returned funds, they can use  them to supplant the states’ own share of future Medicaid spending or  even use them for non-Medicaid purposes. Because such arrangements  effectively increase the federal Medicaid share above what is set under  law, they violate the fiscal integrity of Medicaid’s federal-state partnership.  As new schemes have come to light, Congress and CMS have taken  legislative and regulatory actions to curtail them; nonetheless, problems  remain. We believe Congress and CMS should continue their efforts to  preclude states’ ability to claim excessive federal Medicaid payments, and  we suggest that Congress consider a recommendation that remains open  from our prior work, that is, to prohibit Medicaid payments that exceed  actual costs for any government-owned facility.
subsections: section_title: Background
paragraphs: Title XIX of the Social Security Act authorizes federal funding to states for  Medicaid, which finances health care services including acute and long- term care for certain low-income, aged, or disabled individuals. States  have considerable flexibility in designing and operating their Medicaid  programs. Within broad federal requirements, each state determines which  services to cover and to what extent, establishes its own eligibility  requirements, sets provider payment rates, and develops its own  administrative structure. In addition to groups for which federal law  requires coverage—such as children and pregnant women at specified  income levels and certain persons with disabilities—states may choose to  expand eligibility or add benefits that the statute defines as optional.
Medicaid is an open-ended entitlement: states are generally obligated to  pay for covered services provided to eligible individuals, and the federal  government is obligated to pay its share of a state’s expenditures under a  CMS-approved state Medicaid plan. The federal share of each state’s  Medicaid expenditures is based on a statutory formula linked to a state’s  per capita income in relation to national per capita income. In 2002, the  specified federal share of each state’s expenditures ranged from 50  percent to 76 percent; in the aggregate, the federal share of total Medicaid  expenditures was 57 percent. The Social Security Act provides that up to  60 percent of the state share of Medicaid spending can come from local- government revenues and sources. Some states design their Medicaid  programs to require local governments to contribute to the programs’  costs.
section_title: Some State Financing Schemes Have Used IGTs to Create the Illusion of Valid Medicaid Expenditures
paragraphs: For more than a decade, some states have used various financing schemes,  some involving IGTs, to create the illusion of a valid state Medicaid  expenditure to a health care provider. This payment has enabled states to  claim federal matching funds regardless of whether the program services  paid for had actually been provided. As various schemes have come to  light, Congress and CMS have taken actions to curtail them (see table 1).  Many of these schemes involve payment arrangements between the state  and government-owned or government-operated providers, such as local- government-operated nursing homes.
A variant of these creative financing arrangements involves states’  exploitation of Medicaid’s upper payment limit (UPL) provisions. These  schemes share certain characteristics, including IGTs, with other financing  schemes from prior years (see table 1). In particular, these arrangements  create the illusion that a state has made a large Medicaid payment— separate from and in addition to Medicaid expenditures that providers  have already received for covered services—which enables the state to  obtain a federal matching payment. In reality, the large payment is  temporary, since the funds essentially make a round-trip from the state to  the Medicaid providers and back to the state. As a result of such round-trip  arrangements, states obtain excessive federal Medicaid matching funds  while their own state expenditures remain unchanged or even decrease.  Figure 1, which is based on our earlier work, illustrates how this  mechanism operated in one state (Michigan).
As shown in figure 1, the state made Medicaid payments totaling   $277 million to certain county health facilities; the total included   $155 million in federal funds and $122 million in state funds (step 1). On  the same day that the county health facilities received the funds, they  transferred all but $6 million back to the state, which retained   $271 million (steps 2 and 3). From this transaction, the state realized a net  gain of $149 million over the state’s original outlay of $122 million. In cases  like this, local-government facilities can use IGTs to easily return the  excessive Medicaid payments to the state via electronic wire transfers. We  have found that these round-trip transfers can be accomplished in less  than 1 hour. The IGT is critical, because if the payment does not go back  to the state, the state gains no financial benefit and actually loses from the  arrangement because it has simply paid the provider more than its  standard Medicaid payment rate for the services. In a variant of this  practice, some states require a few counties to initiate the transaction, by  taking out bank loans for the total amount the states determined they can  pay under the UPL. The counties wire the funds to the states, which then  send most or all of the funds back to the counties as Medicaid payments.  The counties use these “Medicaid payments” to repay the bank loans.  Meanwhile, the states claim federal matching funds on the total amount.
Consistent with past actions, Congress and CMS have taken steps to  curtail UPL financing schemes when they have come to light. At the  direction of Congress, the agency—then called the Health Care Financing  Administration (HCFA)—finalized a regulation in 2001 that significantly  narrowed the UPL loophole by limiting the amount of excessive funds  states could claim. HCFA estimated that its 2001 regulation would reduce  the federal government’s financial liability due to inappropriate UPL  arrangements by $55 billion over 10 years; a related 2002 regulation was  estimated to yield an additional $9 billion over 5 years. CMS recognized  that some states had developed a long-standing reliance on these  excessive UPL funds, and the law and regulation authorized transition  periods of up to 8 years for states to come into compliance with the new  requirements. As we recently reported, however, even under the new  regulations, states can still aggregate payments to all local-government  nursing homes under one UPL to generate excessive federal matching  payments beyond their standard Medicaid claims. For example, CMS  information about states complying with the new regulation indicates that,  through UPL arrangements with public nursing homes and other public  facilities, states can still claim about $2.2 billion annually in federal  matching funds exceeding their standard Medicaid claims.
section_title: Financing Schemes Undermine Medicaid’s Federal-State Partnership
paragraphs: States’ use of these creative financing mechanisms undermines the  federal-state Medicaid partnership as well as the program’s fiscal integrity  in at least three ways.
First, state financing schemes effectively increase the federal matching  rate established under federal law by increasing federal expenditures  while state contributions remain unchanged or even decrease. For  example, for one state we analyzed (Wisconsin), we estimated that by  obtaining excessive federal matching payments and using these funds as  the state share of other Medicaid expenditures, the state effectively  increased the federal matching share of its total Medicaid expenditures  from 59 percent to 68 percent in state fiscal year 2001. The state did so by  generating nearly $400 million in excessive federal matching funds via  round-trip arrangements with three counties. Similarly, the HHS Office of  the Inspector General found that a comparably structured arrangement in  Pennsylvania effectively increased that state’s statutorily determined  matching rate from 54 percent to about 65 percent.
Second, CMS has no assurance that these increased federal matching  payments are used for Medicaid services. Federal Medicaid matching  funds are intended for Medicaid-covered services for the Medicaid-eligible  individuals on whose behalf payments are made. Under state financing  schemes, however, states can use funds returned to them at their own  discretion. We recently examined how six states with large UPL financing  schemes involving nursing homes used the federal funds they generated.  As in the past, some states in our review deposited excessive funds from  UPL arrangements into their general funds, which the states may or may  not use for Medicaid purposes. For example, one state (Oregon) has used  funds generated by its UPL arrangement to help finance education  programs. Table 2 provides further information on how states used their  UPL funds in recent years, as reported by the six states we reviewed.
Third, these state financing schemes undermine the fiscal integrity of the  Medicaid program because they enable states to make to providers  payments that significantly exceed their costs. In our view, this practice is  inconsistent with the statutory requirement that states ensure that  Medicaid payments are economical and efficient. Under UPL financing  arrangements, some states pay a few public providers excessive amounts,  well beyond the cost of services provided. We found, for example, that  Virginia’s proposed arrangement would allow the state to pay six local- government nursing homes, on average, $670 in federal funds per Medicaid  nursing home resident per day—more than 12 times the $53 daily federal  payment these nursing homes normally received, on average, per Medicaid  resident.
section_title: Further Federal Action Would Help Address Continuing Concerns with State Financing Schemes
paragraphs: Although CMS and the Congress have often acted to curtail states’  financing schemes, problems persist. Improved CMS oversight and  additional congressional action could help address continuing concerns  with UPL financing schemes and other inappropriate arrangements.
We recently reported that CMS has taken several actions to improve its  oversight of state UPL arrangements, including forming a team to  coordinate its review of states’ proposed and continuing arrangements,  drafting internal guidelines for reviewing state methods for calculating  UPL amounts, and conducting financial reviews that have identified  hundreds of millions of dollars in improper claims. Starting in August  2003, when considering states’ proposals to change how they would pay  nursing homes or other institutions, CMS also began to ask states to  provide previously unrequested information. The information includes  sources of state matching funds for supplemental payments to Medicaid  providers, the extent to which total payments would exceed providers’  costs, how a state would use the additional funds, and whether a state  required providers to return payments (and, if so, how the state planned to  spend such funds). As of October 2003, CMS indicated that it had asked 30  states with proposed state Medicaid plan amendments to provide  additional information, and the agency was in the process of receiving and  reviewing states’ initial responses.
We also reported, however, that CMS’s efforts do not go far enough to  ensure that states’ UPL claims are for Medicaid-covered services provided  to eligible beneficiaries. Moreover, we remain concerned that in carrying  out its oversight responsibilities, CMS at times takes actions inconsistent  with its stated goals for limiting states’ use of these arrangements. For  example, we previously reported that while the agency was attempting to  narrow the glaring UPL loophole in 2001, it was allowing additional states  to engage in the very schemes it was trying to shut down, at a substantial  cost to the federal government. More recently, we reported that CMS’s  granting two states the longest available transition period of 8 years, for  phasing out excessive claims under their UPL arrangements, was not  consistent with the agency’s stated goals. We estimated that, as a result of  these decisions, these two states can claim about $633 million more in  federal matching funds under their 8-year transition periods than they  could have claimed under shorter transition periods consistent with CMS’s  stated policies and goals.
In our view, additional congressional action also could help address  continuing concerns about Medicaid financing schemes. Although  Congress and CMS have taken significant steps to help curb inappropriate  UPL arrangements and other financing schemes, states can still claim  federal matching funds for more than a public provider’s actual costs of  providing Medicaid-covered services. As long as states are allowed to  make payments exceeding a facility’s actual costs, the loophole remains. A  recommendation open from one of our earlier reports would, if  implemented, close the existing loophole and thus mitigate these  continuing concerns. We previously recommended that Congress consider  prohibiting Medicaid payments that exceed actual costs for any  government-owned facility. If this recommendation were implemented, a  facility’s payment would be limited to the reasonable costs of covered  services it actually provides to eligible beneficiaries, thus eliminating the  possibility of the exorbitant payments that are now passed through  individual facilities to states. The Administration appears to support such  legislative action; the President’s budget for fiscal year 2005 sets forth a  legislative proposal to cap Medicaid payments to government providers  (such as public hospitals or county-owned nursing homes) to the actual  cost of providing services to Medicaid beneficiaries.
section_title: Conclusions
paragraphs: The term “IGTs” has come to be closely associated—if not synonymous— with the abusive financing schemes undertaken by some states in  connection with illusory payments for Medicaid services to claim  excessive federal matching funds. IGTs are a legitimate state budget tool  and not problematic in themselves. But when they are used to carry out  questionable financial transactions that inappropriately shift state  Medicaid costs to the federal government, they become problematic.
We believe the problem goes beyond IGTs. An observation we made in our  first report on this issue in 1994 is as valid today as it was then: in our  view, the Medicaid program should not allow states to benefit from  arrangements where federal funds purported to benefit providers are given  to providers with one hand, only to be taken back with the other. State  financing schemes, variants of which have been applied for a decade or  longer, circumvent the federal and state funding balance set under law.  They have also resulted in the diversion of federal funds intended to pay  for covered services for Medicaid-eligible individuals to whatever purpose  a state chooses.
Although Congress and CMS have often acted to address Medicaid  financing schemes once they become apparent, new variations continue to  emerge. Experience shows that some states are likely to continue looking  for creative means to supplant state financing, making a compelling case  for the Congress and CMS to sustain vigilance over federal Medicaid  payments. Understandably, states that have relied on federal funding as a  staple for their own share of Medicaid spending are feeling the budgetary  pressure from the actual or potential loss of these funds. The continuing  challenge remains to find the proper balance between states’ flexibility to  administer their Medicaid programs and the shared federal-state fiduciary  responsibility to manage program finances efficiently and economically in  a way that ensures the program’s fiscal integrity.
Mr. Chairman, this concludes my prepared statement. I will be happy to  answer any questions that you or Members of the Subcommittee may have.
section_title: Contact and Acknowledgments
paragraphs: For future contacts regarding this testimony, please call Kathryn G. Allen  at (202) 512-7118. Katherine Iritani, Tim Bushfield, Ellen W. Chu, Helen  Desaulniers, Behn Miller Kelly, and Terry Saiki also made key  contributions to this testimony.
section_title: Related GAO Products
paragraphs: Medicaid: Improved Federal Oversight of State Financing Schemes Is  Needed. GAO-04-228. Washington, D.C.: February 13, 2004.
Major Management Challenges and Program Risks: Department of  Health and Human Services. GAO-03-101. Washington, D.C.: January  2003.
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.
State Medicaid Financing Practices. GAO/HEHS-96-76R. Washington,  D.C.: January 23, 1996.
Michigan Financing Arrangements. GAO/HEHS-95-146R. Washington,  D.C.: May 5, 1995.
Medicaid: States Use Illusory Approaches to Shift Program Costs to  Federal Government. GAO/HEHS-94-133. Washington, D.C.: August 1,  1994.
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