U.S. Insular Areas: Multiple Factors Affect Federal Health Care Funding
Published: 2005-10-14T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Five insular areas of the United States--American Samoa, the Commonwealth of the Northern Mariana Islands (CNMI), Guam, Puerto Rico, and the U.S. Virgin Islands--benefit from federal health care financing and grant programs that help fund health care services to their over 4 million residents. However, notable differences exist in how the programs are funded or operate in the insular areas, such as statutory limits on federal Medicaid funding to the insular areas that do not apply in the states. To help understand these differences, GAO was asked to identify (1) the key sources of federal health care funding in the insular areas, (2) differences between insular areas and the states in the methods used to allocate these funds, and (3) differences in spending levels per individual between insular areas and the states. In commenting on a draft of this report, American Samoa, CNMI, and Puerto Rico suggested the need for additional information on certain issues, such as implications of statutory limits on federal Medicaid spending and a more comprehensive analysis of local circumstances that affect the availability and costs of health care services.
section_title: What GAO Found
paragraphs: Multiple federal programs fund health care services in the insular areas. Federal health care financing programs--Medicare, Medicaid, and the State Children's Health Insurance Program (SCHIP)--represented nearly 90 percent of the $2.2 billion in health care funding to these areas in fiscal year 2003, with Medicare alone representing over three-quarters of total funding. The Departments of Health and Human Services (HHS) and the Interior (DOI) also provide grants to the insular areas. Significant variation exists among the insular areas in terms of the distribution of funds by these sources, largely due to the number of Medicare beneficiaries in each area. The methods used to allocate these federal funds to insular areas often differ from methods used in the states. For example, Medicare pays hospitals in most insular areas based on their costs rather than the prospective payment system used for most hospitals in the states. Similarly, federal funding for Medicaid and SCHIP is subject to statutory limits that do not apply to states, including minimum federal contributions and a cap on federal Medicaid payments. In addition, certain HHS grants use different rules to determine insular areas' funding. Differences in allocation methods as well as other factors contribute to lower spending levels per individual in the insular areas compared to the states. For example, Medicare spending per beneficiary in the insular areas was less than half the amount it was in the states, due in part to differences in payment policies and to beneficiaries' lower utilization of services. In addition, the statutory limits on federal Medicaid funding in these areas contributed to lower federal Medicaid per capita payments in the five insular areas compared to the national average. However, in light of limits on federal funding, the insular areas are not held accountable for covering all Medicaid benefit requirements, such as nursing facility services that represent nearly one-third of Medicaid expenditures in the states. Insular areas benefit from certain HHS grant allocation formulas that result in higher per capita payments to them than the states, on average.

section_title: Letter
paragraphs: The five largest insular areas of the United States—American Samoa, the  Commonwealth of the Northern Mariana Islands (CNMI), Guam, Puerto  Rico, and the U.S. Virgin Islands—and their more than 4 million residents  have a unique relationship with the federal government. With the  exception of American Samoa, those born in the insular areas are U.S.  citizens; however, insular area residents are not afforded all of the rights  of citizens residing in the 50 states.2, 3 Although numerous federal health  care financing and social programs—including Medicare, the federal  health care program for the elderly and disabled, and Medicaid, the joint  federal-state program that finances health care for certain low-income  individuals—have been extended to insular area residents to varying  degrees, notable differences exist in how these programs are funded or  operate in the insular areas compared to the states. For example, the  insular areas are subject to statutory limits on federal Medicaid funding  that do not apply to the states. To help understand these differences, you  asked us to identify (1) the key sources of federal health care funding in  the insular areas, (2) the extent to which the methods used to allocate  these sources of health funds differ from the methods used in the states,  and (3) how spending levels per individual from these key sources differ  between insular areas and the states.
Throughout this report, the term states refers to the 50 states and the District of Columbia.
Those born in American Samoa are considered to be American nationals of the United  States. An American national is either a citizen or someone who “owes permanent  allegiance to the United States.” 8 U.S.C. § 1101(a)(21), (22) (2000). While American  nationals are not entitled to all the benefits for which only citizens qualify, they are not  aliens and therefore cannot be expelled or deported. health expenditure data for federal fiscal years 1999 through 2003 from the  respective agencies. To assess the reliability of HHS and DOI data, we  discussed data quality control procedures and reviewed relevant  documentation with officials. We determined the data were sufficiently  reliable for the purposes of this report.
To determine the extent to which methods used to allocate funds to the  insular areas differ from those used in the states, we reviewed federal laws  and guidance on this funding and interviewed agency and insular area  officials. To determine the extent to which spending levels per individual  from these key sources differ between insular areas and the states, we  examined trends in program expenditures between states and insular  areas. To assess the reliability of the program expenditure data, we  reviewed relevant documentation, interviewed agency officials about the  data, and conducted electronic data testing. We determined that the  program expenditure data were sufficiently reliable for the purposes of  this report. We conducted our work from October 2004 through September  2005 in accordance with generally accepted government auditing  standards. (For additional information on our methodology, see app. I.)
subsections: section_title: Background
paragraphs: Five insular areas—American Samoa, Guam, CNMI in the Pacific Ocean,  and the Commonwealth of Puerto Rico and the Virgin Islands in the  Caribbean Sea—represent the largest insular areas of the United States.  More than 4 million U.S. citizens and nationals live in these insular areas  under the sovereignty of the United States. These areas vary in terms of  how they came under the sovereignty of the United States and also in  terms of their demographics, such as median age and education levels.  However, all of these insular areas participate in three major federal health  care financing programs—Medicare, Medicaid, and SCHIP—and are  eligible for a variety of federal health grant programs.
subsections: section_title: Relationship to United States
paragraphs: These five areas have come under the sovereignty of the United States in  various ways. Puerto Rico and Guam were ceded to the United States by  treaty at the end of the Spanish-American War in 1898, and the Virgin  Islands were purchased from Denmark in 1917. Following the renunciation  by Great Britain and Germany of their claims to what is now American  Samoa and the cession of these islands by the Samoan chiefs to the United  States, the Congress ratified the instruments ceding the islands to the  United States in 1929. The United States was responsible for administering  the Northern Mariana Islands after World War II under a United Nations  trusteeship agreement. In 1976, a covenant between the United States and  the Northern Marianas established the islands as a commonwealth under  the sovereignty of the United States.
Each of these areas has its own government and maintains a unique  diplomatic relationship with the United States. General federal  administrative responsibility for all insular areas but Puerto Rico is vested  in the Department of the Interior. All departments, agencies, and officials  of the executive branch treat Puerto Rico administratively “as if it were a  state;” any matters concerning the fundamentals of the U.S.-Puerto Rican  relationship are referred to the Office of the President.
People born in Puerto Rico, Guam, CNMI, or the Virgin Islands are  American citizens; those born in American Samoa are American nationals.  The residents of all five of these larger insular areas enjoy many of the  rights enjoyed by U.S. citizens in the 50 states. But some rights that, under  the Constitution, are reserved for citizens residing in the states, have not  been extended to residents of the insular areas. For example, residents of  the insular areas cannot vote in national elections, nor do they have voting  representation in the final approval of legislation by the full Congress.
section_title: Characteristics of the Insular Areas
paragraphs: The insular areas—particularly those in the Pacific—are geographically  isolated from the United States. For example, Hawaii, which is the closest  state to the Pacific insular areas, lies 3,300 to 3,700 miles away, or up to   13 hours by air. In addition, when compared to the U.S. states and each  other, the insular areas have unique demographic characteristics. For  example, with the exception of Puerto Rico, the populations in the insular  areas are small relative to the states, and with the exception of Guam, they  are significantly poorer. For example, four of the insular areas have  median incomes that range from about $14,000 to about $25,000,  considerably lower than the two poorest states, Mississippi and West  Virginia. In addition, the populations in the Pacific island areas— American Samoa, CNMI, and Guam—are younger than those of the states  and Puerto Rico and the Virgin Islands. For example, nearly half of the  population of American Samoa is under the age of 19 compared to about  27 percent in the United States. Similarly, while over 12 percent of the U.S.  population is over 65, this age cohort represents only 1.5 to 5.3 percent of  the population in the three Pacific insular areas. In terms of available  health indicators, the differences are not as clear. While the insular areas  have a higher mortality rate than the U.S. for certain diseases, such as  diabetes, their mortality rates for cancer are lower. (See fig. 1.)
Some insular areas do not have certain types of health care providers, and  even when providers operate in these areas, their numbers per capita are  lower, on average, than in the states. For example, most of the insular  areas do not have Medicare-certified outpatient rehabilitation facilities,  community mental health centers, or ambulatory surgical centers. In  addition, none of the Pacific insular areas has a Medicare-certified, free- standing skilled nursing facility or a Medicare-certified hospice facility.  Provider shortages in insular areas are often particularly acute for certain  specialists. For example, although Guam has a cardiac catheterization  lab, it is not used because there is no cardiac surgeon. Also, although its  rate of diabetes death is high, American Samoa has no resident  nephrologists. Instead, the nephrologist that serves the area is based at St.  Francis Medical Center in Hawaii. When providers are present, the average  number per capita is usually lower than in the states, although the  differences between the states and Puerto Rico are less pronounced than  the differences among the states and the other four insular areas. For  example, the insular areas have significantly fewer skilled nursing facilities  than do the states. One notable exception is that there are more end-stage  renal facilities per capita in American Samoa, Guam, and the Virgin Islands  when compared to the states, perhaps due to a higher prevalence of  diabetes in these areas. (See table 1.)
section_title: Federal Health Care Financing and Grant Programs
paragraphs: Each insular area participates in three major federal health care financing  programs—Medicare, Medicaid, and SCHIP. In addition, each area  receives health-related grant funds from a variety of HHS agencies and  four of the five areas receive health-related grant funds from DOI.
Medicare covers a variety of health care services and items for more than  41 million beneficiaries—individuals who are 65 or older, have end-stage  renal disease (ESRD), or are disabled—including about 600,000 in the  insular areas. Medicare includes separate components or “parts” that  cover different types of services. Individuals who are eligible for Medicare  automatically receive Hospital Insurance, known as Part A, which helps  pay for inpatient hospital care, skilled nursing facility services following a  hospital stay, certain home health services, and hospice care. Beneficiaries  pay no premiums for Part A but are liable for required deductibles,  coinsurance, and copayments. Medicare Part A is funded through the  Medicare trust fund, which is financed by state and insular area employer  and employee contributions. Medicare Part B Supplemental Medical  Insurance helps pay for physician, outpatient hospital care, laboratory,  and other services. Beneficiaries who opt for Part B coverage must pay a  premium—about $78 per month in 2005—and are responsible for  deductibles, coinsurance, and copayments.
Medicare’s new prescription drug program, Part D, was authorized in  December 2003, and the interim phase of the program began in June 2004.  Under the interim phase, all beneficiaries in the states and the insular  areas who choose to enroll pay a fee to receive a discount drug card, with  an expected discount of 10 to 15 percent on covered drugs. In addition,  certain low-income beneficiaries in the states are also entitled to  assistance to subsidize drug costs in 2004 and 2005, and the amount of  assistance available to each individual is generally $600 per year. Under  the permanent program, to be implemented in January 2006, beneficiaries  in the states and the insular areas can choose to enroll in an optional  prescription drug coverage program subject to an estimated average  monthly premium of about $32. Like the interim program, certain low- income participants in the states will also receive subsidies to lower their  monthly premiums, deductibles, and copayments. To help offset the costs  of providing coverage to individuals eligible for both Medicare and  Medicaid, states must pay the federal government an amount that is  roughly equal to the amount they would have paid to provide outpatient  prescription drug coverage to elderly and disabled individuals previously  eligible for prescription drug benefits under their Medicaid programs.   Part D is otherwise financed through beneficiary premiums and general  revenues.
Medicaid operates as a joint federal-state program to finance health care  coverage for certain categories of low-income individuals, including  children, pregnant women, and individuals who are elderly or disabled.  Although state and insular area participation in Medicaid is voluntary, all  states and insular areas currently participate in the program. To obtain  federal matching funds, states and insular areas generally must comply  with certain minimum federal requirements related to services and  eligibility, including income and resource requirements. Within these  broad federal guidelines and under federally approved plans, states and  insular areas have great discretion in setting eligibility standards and  provider payment rates; determining the amount, scope, and duration of  covered benefits; and developing their own administrative structures. For  example, while federal law requires Medicaid programs to offer coverage  to children age 5 and under if their family incomes are at or below   133 percent of the federal poverty level and to children ages 6 to 18 if their  family incomes are at or below the federal poverty level, a state may  decide to increase the thresholds in order to offer coverage to more  people. As a result, Medicaid essentially operates as 56 separate programs:  1 in each of the 50 states, the District of Columbia, and each of the   5 largest insular areas. The federal share of states’ Medicaid programs, the  Federal Medical Assistance Percentage (FMAP), is determined based on  state per capita income in relation to the national per capita income, with  poorer states receiving higher federal matching rates than wealthier states.  In 2005, the FMAP ranged from 50 percent in wealthier states, such as New  York and Connecticut, to about 77 percent in Mississippi.
In 1997, the Congress enacted SCHIP to provide health care coverage to  uninsured, low-income children living in families whose incomes exceed  the eligibility limits for Medicaid. States and insular areas have three  options in designing SCHIP: expand their Medicaid programs, develop  separate child health programs that function independently of the  Medicaid programs, or do a combination of both. States that implement  SCHIP by expanding Medicaid must use their Medicaid enrollment and  benefit structure. Although SCHIP is generally targeted to families with  incomes at or below 200 percent of the federal poverty level, each state or  insular area may set its own income eligibility limits within certain  guidelines. The FMAP for SCHIP ranges from 65 percent for the wealthiest  states to about 84 percent for the poorest states.
Various HHS agencies also distribute health care grants to the insular  areas. These grant funds—awarded by agencies such as the Centers for  Disease Control and Prevention (CDC), the Health Resources and Services  Administration (HRSA), and the Substance Abuse and Mental Health  Services Administration (SAMHSA)—may be used to support health care  services and outreach programs and are generally awarded to public  health agencies. Similarly, DOI’s Office of Insular Affairs (DOI-OIA) funds  health infrastructure and provides technical assistance to all insular areas  but Puerto Rico. DOI also provides the Pacific insular areas with funds to  offset the cost of providing services to residents of the freely associated  states.
section_title: Multiple Federal Agencies Fund Health Care Services in Insular Areas
paragraphs: Each of the five insular areas receives funding for health care services  from multiple federal sources. Federal health care financing programs— Medicare, Medicaid, and SCHIP—comprised 88 percent of aggregate  federal health care funding in the insular areas in fiscal year 2003, with  Medicare representing the single largest funding source (76 percent). The  areas also received a significant amount of health care grant funding from  certain HHS agencies and DOI. However, significant variation exists  among the insular areas in terms of the distribution of funds by source,  largely due to the number of Medicare beneficiaries residing in each area.  For example, the Pacific insular areas have relatively young populations,  and therefore receive less Medicare funding compared to other sources.  From fiscal years 1999 through 2003, total federal health care funding in  the insular areas increased by 37 percent, although funding increases  varied considerably among the insular areas.
subsections: section_title: Medicare Represents the Majority of Federal Health Care Spending in Insular Areas
paragraphs: Federal health care financing programs—primarily Medicare—comprised  the vast majority of the $2.2 billion in total federal health care spending in  the five insular areas in fiscal year 2003. Medicare funds alone, which are  generally paid directly to health care providers for services to  beneficiaries rather than directly to the insular area government,  represented 76 percent—about $1.68 billion—of the aggregate funding to  the insular areas. (See fig. 2.) The Medicaid program represented   10 percent of the total funding in the insular areas, about $226 million, and  funding for the SCHIP program totaled about $33 million, 2 percent of total  health care funding in these areas. Unlike Medicare, Medicaid and SCHIP  funds are provided directly to the insular area governments.
In addition to the federal health care financing programs, three HHS  agencies—CDC, HRSA, and SAMHSA—provided health-related grants to  public and private entities in the insular areas. These grants represented  approximately 11 percent, more than $250 million, of total federal health  care funding in the insular areas. In 2003, these agencies awarded grants  from 87 different programs to the insular areas, with individual awards  ranging from over $9,000 to nearly $39 million. The funds may be used to  support health care services and outreach programs. For example, HRSA  provided grant funding to the insular areas for programs related to health  care resources and services, including community health centers, human  immunodeficiency virus (HIV) care and treatment, maternal and child  health care, and bioterrorism preparedness.
DOI also provided a number of health-related grants to the four insular  areas that were eligible for these funds. In fiscal year 2003, DOI grants to  the insular areas totaled about $13.6 million, 1 percent of federal health  care funding in the insular areas. The grants had multiple purposes,  including offsetting the costs of providing care to individuals from the  freely associated states and supporting health-care-related activities, such  as facility construction and information technology.
From 1999 through 2003, total federal health care funding in the insular  areas increased 37 percent—from over $1.6 billion to over $2.2 billion.  During this time, funding from all sources but SCHIP increased. For  example, total Medicare funding increased by 41 percent, Medicaid by   21 percent, HHS grants by 73 percent, and DOI by 11 percent. Although  funds from HHS had the largest percentage increase over this time, the  biggest increase in dollars was seen in Medicare, with an increase of over  $485 million.
section_title: Health Care Grants Represent Smaller Share of Federal Funding in Puerto Rico Compared to Other Insular Areas
paragraphs: Since Puerto Rico represents about 91 percent of total insular area  population, the aggregate spending numbers obscure the often significant  variation that exists in the sources of funding among the insular areas. For  example, similar to aggregate numbers, Medicare spending represented   78 percent of spending in Puerto Rico in fiscal year 2003, whereas the  Medicare share in the other areas was smaller, ranging from 29 percent in  American Samoa to 63 percent in the Virgin Islands. (See fig. 3.) This  variation is influenced by differences in the share of Medicare  beneficiaries residing in each area relative to its overall population. For  example, Medicare as a share of total spending was largest in both Puerto  Rico and the Virgin Islands, whose populations of individuals 65 or older  are comparatively larger than that of the Pacific insular areas and are more  closely aligned with the U.S. average. Differences in the other federal  health financing programs also varied, but to a lesser extent, with  Medicaid and SCHIP funding combined representing between 12 and   21 percent of health care funding in each of the areas.
In terms of health care grants from both HHS and DOI, significant  variation existed in the share of health care funding they represented  among the insular areas. For example, in fiscal year 2003, these grants  represented 11 percent of total health care funding in Puerto Rico;  however, they represented 25 to 56 percent of total funding in the other  insular areas. Variation among the insular areas in terms of DOI health  grants as a share of total federal funding was more pronounced than that  of HHS grants during this time. While HHS grants represented roughly the  same share of total health care funding in each insular area except Puerto  Rico, DOI grants represented 2 percent of total health care funding in  CNMI, 7 percent in Guam, and 37 percent in American Samoa. The Virgin  Islands, although eligible for these funds, received none in fiscal year 2003.
The availability of grant funds, and therefore the share they represented of  health care funding, has fluctuated considerably in recent years. For  example, DOI grants to CNMI, which represented 2 percent of total health  care funds in 1999, increased to 26 percent of total funding in 2001 and fell  back to 2 percent in 2003. Similarly, HHS grants to the Virgin Islands  represented 13 percent of total federal health funding in 1999, but grew to  nearly one-third of total spending in 2002. (See app. II for a detailed  description of trends in federal funding sources over time for each insular  area.) Such year-to-year variability can make it difficult to establish long- range budgets and to develop, manage, and staff programs funded by grant  awards. In addition, according to insular area officials, capturing and  retaining HHS grant funds can be labor intensive. For example, for most of  the grants we reviewed, agencies require insular areas and states to  complete comprehensive applications with detailed budgets and program  plans. Agencies may also require periodic data reporting or local cost  sharing.
When considered individually, each of the five insular areas experienced  an overall increase in total federal health care funding from 1999 through  2003. Increases, however, varied considerably among the areas, ranging  from 36 percent in Puerto Rico to 81 percent in CNMI. The variation was  largely due to differences in the annual increases specific to Medicare and  HHS grant awards. For example, Medicare funding increased in all areas,  but most dramatically in CNMI, largely due to changes in the way its  hospital reported costs to CMS. Similarly, total HHS grant funding  increased in each area, although increases were more pronounced in  certain areas, such as American Samoa and Guam, due in part to the  introduction of new grants related to bioterrorism.
section_title: Notable Differences Exist in Methods Used to Allocate Federal Health Care Funds in the Insular Areas Compared to the States
paragraphs: The methods used to allocate federal health care funds in the insular areas  differ, in some cases, from those used in the states. Although Medicare  payment policy does not differ for certain providers, such as physicians,  notable differences exist in the policies used to pay hospitals and for the  new Part D prescription drug benefit. Similarly, differences exist in how  the Medicaid and SCHIP programs are funded in the insular areas. Unlike  in the states, the federal share of Medicaid and SCHIP expenditures in the  insular areas—the FMAP—is limited by statute, and federal Medicaid  funding is capped. In addition, allocation methods used for certain HHS  grants establish separate rules for the insular areas.
subsections: section_title: Medicare Funds Are Allocated Differently for Parts A and D
paragraphs: The Medicare program operates similarly in the insular areas and the  states in terms of eligibility for the program and beneficiaries’ entitlement  to benefits. For example, like their counterparts in the states, insular area  residents who are eligible for Medicare are automatically enrolled in Part  A and do not pay premiums for this coverage. Likewise, the policies used  to determine payment for physicians under Part B are essentially the same.  However, significant differences exist between the insular areas and the  states regarding the methods used to determine payments to hospitals and  the funding of the Medicare Part D benefit.
Unlike the states and Puerto Rico, where hospitals are paid under  Medicare’s PPS, hospitals in the other insular areas are paid based on their  costs. There are differences in the cost-based payment methods used in  these areas. The hospitals in Guam and the Virgin Islands are paid using  the methodology established under the Tax Equity and Fiscal  Responsibility Act of 1982 (TEFRA) for classes of hospitals not included in  the PPS. Payments to these hospitals are the lesser of their average cost  per discharge or a specific target amount. Hospitals in American Samoa  and CNMI are also paid based on their costs; however, they are not subject  to target amounts or a national cap. We did not evaluate how payments  under these cost-based methods compare to PPS payments to hospitals in  the states.
Although hospitals in Puerto Rico are paid under the PPS system, the  formula that CMS uses to reimburse hospitals in Puerto Rico is distinct  from that used for hospitals in the states. Each of the Puerto Rico PPS  payment rates is a “blended rate,” which is comprised of 75 percent of a  national rate used for hospitals in the states and 25 percent of a local rate,  which is lower than the national rate. The rates are further adjusted for  each hospital using national and local cost factors. These adjustments  account for the lower costs of providing hospital services in Puerto Rico  compared to the states and for differing costs among hospitals within  Puerto Rico.
Differences also exist between the insular areas and the states regarding  the methods used to fund Medicare’s new Part D prescription drug benefit  for low-income beneficiaries. For example, during the interim phase of the  Part D program, certain low-income beneficiaries in the states who  participate in the program are entitled to assistance to subsidize drug  costs in 2004 and 2005, and the amount of assistance available to each  individual is generally $600 per year. In contrast, low-income Medicare  beneficiaries in the insular areas do not receive this direct subsidy.  Instead, CMS provided each insular area with an allotment, which the  insular areas typically used to subsidize prescription drug coverage to  certain low-income Medicare beneficiaries. Similarly, although the  permanent Part D program, scheduled to begin in January 2006, allows for  identical coverage for most beneficiaries in the insular areas and states,  however, low-income beneficiaries in the insular areas will not receive  direct benefits to help subsidize their premiums, deductibles, and  copayments available to Medicare and Medicaid dual eligible beneficiaries  in the states. Instead, CMS will again provide each of the insular areas an  allotment, which they will use to administer the program to low-income  beneficiaries based on a locally-developed plan. The extent to which the  benefits in the insular areas will mirror the federal program is not clear as  none of the insular areas has finalized its plan for the administration of  this program.
section_title: Medicaid and SCHIP Federal Funding to the Insular Areas Is Limited by Statute
paragraphs: Like the states, each of the insular areas receives federal funding from the  Medicaid and SCHIP programs. However, how federal funds for these  programs are allocated to the insular areas differs, often significantly, from  the states, and these differences are statutory in nature. For example,  recognizing that states vary in their capacity to pay for Medicaid expenses,  the statutory formula used to calculate the federal share of each state’s  expenditures—the FMAP—is based on a state’s per capita income in  relation to the national average per capita income. The FMAP ranges from  50 to no more than 83 percent of Medicaid expenditures, with poorer  states receiving a higher federal matching rate than wealthier states. In  contrast, the FMAP for the insular areas does not recognize their capacity  to pay for Medicaid expenses; instead, the FMAP is set at the lowest rate— 50 percent—although all of the insular areas, except Guam, had a lower  median household income than the poorest U.S. state.
In addition, federal Medicaid funding in states is not limited, provided the  states contribute their share of program expenditures for services  provided. In contrast, federal Medicaid funding in each insular area is  subject to a statutory cap, which is increased annually by the percentage  increase in the medical care component of the Consumer Price Index for  all urban consumers, which averaged about 4 percent per year from 1999  through 2003. All five of the insular areas typically exhaust the Medicaid  cap prior to the end of the fiscal year, and once the cap is exhausted, the  insular areas assume the full costs of Medicaid. Due to insufficient local  funds, once the Medicaid cap is met, some insular areas may suspend  services or cease payments to providers until the next fiscal year.
Federal statute and the Medicaid cap also affect the ability of insular areas  to access certain sources of Medicaid funding. For example, insular areas  are not included in the federal legislation that established the Medicaid  disproportionate share hospital (DSH) program, which provides  supplementary payments to hospitals that serve a large number of  Medicaid and low-income uninsured patients. DSH is a key source of  Medicaid funding for “safety net” hospitals in the states and totaled about  5 percent of all federal Medicaid funding to the states in fiscal year 2003. In  addition, although states and the insular areas are eligible for other  sources of Medicaid federal matching funds, CMS officials said the federal  cap prevents the insular areas from accessing these funds. For example,  none of the insular areas accessed available funding for the development  of immunization registries or for the update of data systems to comply  with provisions of the Health Insurance Portability and Accountability Act  of 1996 (HIPAA) because funds spent on these programs would count  against the cap and thereby divert funds from the direct provision of care.  For this same reason, none of the insular areas participates in the optional  Breast and Cervical Cancer Prevention and Treatment program, which  allows for expanded eligibility and an enhanced Medicaid match rate for  treatment provided to women diagnosed with these cancers. All 50 states  and the District of Columbia have opted to cover women under this  program.
Whereas fundamental differences exist between insular areas and the  states in terms of the allocation of federal Medicaid funds, the differences  that exist in the funding of their SCHIP programs are less pronounced. For  example, unlike Medicaid, where federal funding to the states is open- ended, annual SCHIP allotments to both the states and the insular areas  are set in statute and function like a cap. The statute specified a total  annual allotment for the states and insular areas for fiscal years 1998  through 2007, with the insular areas receiving 0.25 percent of the annual  nationwide SCHIP allotment, which is divided among them based on  statutorily set proportions. The remainder of the allotment is allocated to  states based on the population of low-income uninsured children. The  Congress awarded additional funds to insular areas for fiscal years 1999  through 2007 which, when combined with the original allotment, increased  their portion of total SCHIP funding.
Although SCHIP funding is limited for both states and insular areas, the  FMAP for SCHIP, similar to Medicaid, does not consider the capacity of  insular areas to pay for services. The statute provides for an “enhanced”  FMAP, which is equal to each state and insular area’s Medicaid matching  rate plus 30 percent of the difference between the Medicaid match and 100  percent, not to exceed a federal share of 85 percent. Thus, like states that  receive the minimum 50 percent Medicaid match, the insular areas receive  the minimum 65 percent match available under SCHIP.
section_title: Certain HHS Grants Are Allocated Differently
paragraphs: Each HHS grant has a distinct funding allocation method, and although  certain grants use identical allocation methods for the states and the  insular areas, others treat some or all of the insular areas differently. For  example, the method used to calculate HRSA’s Consolidated Health  Center grants, which are competitive awards made to individual qualifying  health centers based upon proposed budgets and their capacity to  compete for funds, is the same in the states as in the insular areas. In  contrast, different allocation rates are used to determine funding levels for  some insular areas under HRSA’s Ryan White Title II HIV Care Formula  grants to States and CDC’s Public Health Preparedness and Response for  Bioterrorism grant. The allocation formulas for these grants have two  components—a base component, which is a set dollar amount, and a  variable component, which is based on population or other factors. For  example, funding levels for the Ryan White Title II grant are based largely  on the prevalence of AIDS in individual states as well as in Puerto Rico  and the Virgin Islands. In contrast, funding of this grant for the Pacific  insular areas does not consider the prevalence of AIDS; instead, these  insular areas receive a lower, standard base rate. Similarly, when  compared to the states, the base and variable components for the CDC’s  Public Health Preparedness and Response to Bioterrorism grant is smaller  for each of the insular areas except Puerto Rico. (See table 2.)
CDC’s Immunization and Vaccines for Children grant provides another  example of where the method used to allocate funds differs in the insular  areas compared to the states. In this case, grant amounts to the states are  based on certain rules that consider characteristics of the population as  well as funding history. In contrast, these rules are not used to determine  the grant amounts for insular areas. Instead, the award amounts to insular  areas are determined at the discretion of the agency’s project officer.
section_title: Multiple Factors Explain Differences in Individual Spending Levels in Insular Areas Compared to the States
paragraphs: Although most of the key sources of health care funding available in the  insular areas are also available in the states, individual spending levels are  often lower in the insular areas. For example, Medicare spending per  beneficiary is significantly lower in the insular areas, due in part to  differences in methods used to pay for certain services and in  beneficiaries’ utilization of services. In addition, statutory limits on  Medicaid funding in the insular areas contribute to lower per capita  spending. In light of these statutory limits, CMS does not hold insular areas  accountable for providing all the mandatory Medicaid services, including  nursing home care, which makes up nearly a third of Medicaid  expenditures in the states. In contrast, HHS grant funding per capita is  higher in the insular areas than in the states, due, in part, to allocation  formulas that result in higher payments to them as well as to states with  smaller populations.
subsections: section_title: Lower Medicare Spending Per Beneficiary Explained by Payment Policy Differences and Lower Utilization
paragraphs: As in the insular areas, Medicare comprised the majority—over 60  percent—of federal health care funding in the states in fiscal year 2003  and, with limited exceptions, the program operates largely the same in the  insular areas as in the states. However, Medicare spending per beneficiary  in the insular areas in fiscal year 2003 was less than half of Medicare  spending in the states—about $2,800 on average in the insular areas  compared to $6,800 in the states. (See fig. 4.)
Differences in payment policy help explain some of the disparity in  Medicare per beneficiary spending in the insular areas compared to the  states. For example, the PPS methodology used to determine payments to  hospitals in Puerto Rico, which includes a lower local component,  contributes to lower payments. Similarly, the method used to determine  supplemental PPS payments for Medicare’s DSH program results in lower  payments to hospitals in Puerto Rico compared to the states. To qualify  for Medicare DSH payments, at least 15 percent of a hospital’s patient days  must be attributable to certain patients receiving either Supplemental  Security Income (SSI) or Medicaid benefits (which combined serve as a  measure of the number of low-income patients treated by any single  hospital). Further, the actual DSH payment is based on the number of  patient days attributable to these low-income patients. Because residents  of Puerto Rico are statutorily ineligible for SSI payments regardless of  whether or not they meet the income thresholds required for SSI  eligibility, only SSI patients visiting from the states are included in the  counts for DSH. We were informed that, as a result, it is more difficult for  hospitals in Puerto Rico to meet the 15 percent threshold, and those  hospitals meeting the threshold receive limited DSH payments because the  low-income counts do not include some poor patients.
Whether cost-based methods used to pay hospitals in the other insular  areas similarly contribute to lower per beneficiary payments relative to the  states is less clear. However, some of the variation in spending per  beneficiary among the insular areas is likely due to the fact that statutory  limits on Medicare payments apply to hospitals in some, but not all, insular  areas. For example, hospital payments in CNMI are based on what the  hospital claims as its actual costs. These costs are not limited, are not  audited, and have increased dramatically in recent years. In contrast,  under TEFRA, payments to hospitals in the Virgin Islands are limited, and  according to officials with the Medicare fiscal intermediary serving the  Virgin Islands, these payments may not be covering costs. The different  methods used to pay these hospitals likely explain, in part, why Medicare  payments per beneficiary in CNMI are significantly higher than in the  Virgin Islands.
Another factor that helps explain lower Medicare per beneficiary spending  in the insular areas is the extent to which Medicare beneficiaries in the  insular areas use certain covered services. For example, an analysis of  Medicare utilization rates for major medical procedures shows that, on  average, beneficiaries in the insular areas received far fewer of these  services than beneficiaries in the states—rates in the insular areas ranged  from 144 to 203 per thousand beneficiaries compared to 297 per thousand  in the states. Rates were similarly low in Hawaii (172 per thousand), but  not in other remote or poor states studied. (See fig. 5).
Several factors likely contribute to lower Medicare utilization, and  therefore per beneficiary spending, in the insular areas. For example,  limited access to certain specialty services, a lack of Medicare-certified  physicians, and local cultural differences may contribute to lower  Medicare utilization rates. A CMS official serving the Pacific insular areas  reported that certain specialty services, such as chemotherapy, are not  available in these areas, and it is often too expensive for beneficiaries to  travel to receive such services off island. Lower utilization rates of  physician services in American Samoa could also be attributable, in part,  to a lack of Medicare-certified providers. According to a CMS official,  many medical professionals in American Samoa who provide services to  residents are not certified to receive payments under Medicare. Cultural  differences may also contribute to lower utilization of Medicare services in  the insular areas. For example, a CMS official said that some American  Samoans are less likely to seek care in Medicare-certified facilities.  Similarly, reliance on nursing facilities may be less prevalent in certain  insular areas, as families assume primary care responsibility for  individuals who might commonly receive care in these facilities in the  states.
Another factor contributing to lower per beneficiary spending is that the  percentage of Medicare beneficiaries enrolled in Part B is significantly  lower in most of the insular areas than in the states. On average, in 2003  about 77 percent of Medicare beneficiaries in the insular areas opted for  Part B, compared to 95 percent in the states. Insular area officials  provided a number of reasons to explain the enrollment differences. For  example, Medicare beneficiaries in the states and all insular areas but  Puerto Rico are automatically enrolled in Part B, typically around their  65th birthday. However, some insular area officials told us that their  residents opt out of Part B coverage because they cannot afford its  monthly premium, which was about $78 in 2005.40, 41 Also, beneficiaries in  Puerto Rico must go to a local Social Security office to enroll in Part B,  and according to CMS officials, this policy leads to lower enrollment.  Similarly, American Samoa officials said that some of their Medicare  beneficiaries may lack the incentive to purchase Part B coverage as they  have access to free health coverage through the local hospital.
section_title: Medicaid and SCHIP Individual Spending Levels in Insular Areas are Lower; Minimum Program Requirements Are Not Strictly Enforced
paragraphs: Federal Medicaid spending per capita was also lower in the insular areas  compared to the states. In fiscal year 2003, federal Medicaid per capita  spending in the states averaged $565 compared to between $33 and $65 for  the insular areas. Poorer states with higher federal matching rates  received as much as $813 in federal Medicaid per capita spending—more  than 12 times the amount received by any insular area. (See fig. 6.)
Individuals who do not enroll in Part B when they are first eligible may sign up for  coverage during specified open enrollment periods. However, in most cases, the Part B  premium increases 10 percent for each 12-month period that an individual could have had  Part B but did not select it.
State Medicaid agencies provide cost-sharing assistance to certain low-income Medicare  beneficiaries. However, because of the statutory cap on federal Medicaid funding, most of  the insular areas do not participate in these assistance programs, although some insular  areas pay for the Part B premiums for select Medicare beneficiaries.
Key: ● = service covered; ◐ = service covered with limitations; ○ = service not covered  The Kaiser Commission on Medicaid and the Uninsured. Medicaid Benefits: Online Database (The  Henry J. Kaiser Family Foundation). http://www.kff.org/medicaid/benefits/index.jsp (downloaded Aug.  22, 2005).
Mandatory services may not be provided in an insular area because  qualified providers or facilities do not exist. For example, none of the  Pacific insular areas have a Medicaid-certified, free-standing skilled  nursing facility. In other cases, insular areas may not cover certain  services although qualified providers are available. For example, Medicaid- qualified providers are available in Puerto Rico for nursing facility, home  health, nurse midwife, and certified nurse practitioner services; however,  because of the limitations of the Medicaid cap, the Medicaid program does  not include them in its benefit package, according to a Puerto Rico  Medicaid official. Similarly, an official associated with the Virgin Islands’  Medicaid program said that although qualified providers are available,  nurse midwife and nurse practitioner services are not covered due to their  costs. However, the Medicaid programs of some insular areas incur  additional costs that states may not. For example, several insular areas  pay the costs associated with transporting enrollees off-island to receive  services not available locally. The costs associated with transportation are  typically high, particularly for the Pacific insular areas, and count against  the Medicaid cap. In addition, each insular area has chosen to add  benefits, such as coverage for outpatient prescription drugs, which are  optional under the statute. (See app. III for a summary of these optional  benefits.)
Federal SCHIP individual spending levels were also lower in the insular  areas compared to the states. In fiscal year 2003, federal SCHIP spending  per child under age 19 averaged $24 in the insular areas (ranging from $14  in American Samoa to about $25 in Puerto Rico) compared to an average  of $41 in the states. When compared to the states, the insular areas are  poorer and have a higher proportion of children under 19 years of age.  Therefore, the statutory SCHIP allotment, which distributes funds to the  insular areas based on their proportion of total insular population versus  number of uninsured children, contributes to this disparity. However, as is  the case with the Medicaid program, the operation of the SCHIP program  in most of the insular areas is fundamentally different than the states. For  example, while nearly 6 million children were served through SCHIP state  programs in fiscal year 2003, most of the insular areas do not have a  unique SCHIP program that extends health insurance coverage to  additional children. Instead, the insular areas primarily use SCHIP funds to  continue to pay for services provided to children enrolled in the Medicaid  program once the Medicaid cap is met. One exception is Puerto Rico,  which uses SCHIP funding to extend Medicaid coverage to children with  family incomes between 100 and 200 percent of its local poverty level.
section_title: HHS Per Capita Grant Spending Is Higher in Insular Areas
paragraphs: In fiscal year 2003, total HHS per capita spending on health-related grants  from three agencies—CDC, HRSA, and SAMHSA—was higher in the  insular areas compared to the states. On average, these three agencies  awarded about $60 per capita in the insular areas compared to about $48  per capita in the states. Differences in per capita spending are due in part  to the methods used to allocate grant funds. For example, the base rate  formula used to calculate the CDC bioterrorism grant results in higher  payments to all insular areas except Puerto Rico and to states with smaller  populations. In the four smaller insular areas, awards per capita for this  grant range from $5.20 in Guam to $11.37 in American Samoa, and in states  with small populations, such as Alaska and Wyoming, awards were $10.62  and $12.06 respectively compared to $3.61 in the states on average. (See  fig 7.)
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report for comment to HHS, DOI, and key  health officials in each of the five insular areas. We received written  comments from DOI, American Samoa, CNMI, and Puerto Rico, which are  included in appendixes IV, V, VI and VII, respectively. Although HHS  provided no general comments, it did provide technical comments, as did  Puerto Rico, which we incorporated as appropriate.
DOI noted that improving health care in the insular areas is a priority for  both the agency and the insular areas and commented that the report will  help identify areas of disparity which may be reviewed for improvement.  The insular areas expressed concern that the report did not sufficiently  address certain issues, such as implications of statutory limits on federal  Medicaid spending and a more comprehensive analysis of local  circumstances that affect the availability and costs of health care services.  The insular areas also provided a number of specific comments and  suggestions.
Specifically, CNMI and Puerto Rico commented that the statutory limits on  federal Medicaid spending—the Medicaid cap and minimum FMAP—result  in insufficient federal Medicaid payments to the insular areas and explain  the significant differences in federal Medicaid payments between them  and the states. For example, CNMI noted that one patient with an  expensive medical condition, such as a baby with congenital heart disease  or a child with leukemia, can consume a large portion of the available  federal Medicaid contribution in a given year. CNMI also commented that  the federal funding limits prevent its Medicaid program from providing all  Medicaid mandatory services and suggested that the report implied that  this was a “satisfactory state of affairs” because the federal government  does not penalize insular areas for not providing these services. We did not  intend to imply that this is a satisfactory condition; rather, our purpose  was to describe mandatory Medicaid services that are not provided by  insular areas and to explain that, in light of the limits on federal funding,  CMS does not hold these areas accountable for providing these services.  We revised the report to clarify this point.
The three insular areas commented that the report did not adequately  explore other implications of the statutory federal funding limits, including  the impact on the local contribution to total health care costs and the local  health care infrastructure. For example, Puerto Rico commented that as a  result of the limits on federal Medicaid payments, it and other insular  areas shoulder a larger share of financial responsibility for the Medicaid  program than the states, and that the federal contribution to the program  is far less than the minimum FMAP suggests. Similarly, CNMI commented  that the report failed to discuss the effect of limited federal funding on  health outcomes, physician recruitment and retention, and other  necessary government services. American Samoa commented that the  report minimized or omitted local circumstances that affect the costs of  health care services and are major factors in the analysis of federal  funding. For example, a local statute requires the American Samoan  government to provide medical services to qualified citizens at no cost,  and its only hospital, which the government owns and operates, is the sole  provider of primary, secondary, and tertiary care. In combination, these  factors have deterred the development of privately-owned health care  facilities and providers, which can not compete with government-level  charges, and this has limited the availability of services. Where  appropriate, we revised the report to include information about these local  circumstances and their effect on American Samoa’s ability to provide  health care services. A more comprehensive analysis of insular areas’ local  contribution to total health care funding or their health care  infrastructures, however, was beyond the scope of this report.
The insular areas also provided a number of specific comments or  suggestions. For example, CNMI commented that the report implied that  the availability of certain grant funds, including those provided to offset  the cost of providing services to residents of the freely associated states,  ameliorated the adverse effects of disparities in federal funding for the  Medicare and Medicaid programs and added that grant funds are not  enough to replace inadequate Medicaid funding. It was not our intent to  imply that these grants are a substitute for other sources of federal health  care funding. Rather, the report identifies major sources of federal health  care funding in insular areas, of which grants are a significant portion.  Puerto Rico also suggested that the report include a more thorough and  substantive review of several issues it considers to be programmatic  barriers to a balanced partnership between insular areas and the federal  government, including the Medicaid cap, SCHIP allotment methods, and  the level of the Medicare Part D low-income subsidy for insular areas.  Such an analysis was beyond the scope of this report.
Finally, CNMI commented the report should include recommendations to  address what it characterizes as “the outright discrimination in federal  health care funding” for the insular areas and suggested that specific  recommendations could include eliminating the Medicaid cap, calculating  the FMAP based on actual poverty rates, and providing additional  Medicare Part D pharmacy benefits. We acknowledge CNMI’s views on the  adequacy of current levels of federal health care funding. However, we did  not include recommendations in this report because it is the Congress’s  prerogative to set the overall design of the Medicaid program. Puerto Rico  commented that this report describes many of the challenges and the  imbalance affecting the federal and insular area health care partnership,  such as the Medicaid cap, and provides the foundation for the Congress to  address these issues.
As arranged with your offices, unless you publicly announce the contents  of this report earlier, we plan no further distribution of it until 30 days  after its issuance date. At that time, we will send copies of this report to  the Secretary of Health and Human Services, the Secretary of the Interior,  and insular area governments. In addition, the report is available at no  charge on GAO Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact me  at (202) 512-7118 or allenk@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made major contributions to this report are  listed in appendix VIII.
section_title: Appendix I: Scope and Methodology
paragraphs: To compare characteristics of the five largest insular areas—American  Samoa, the Commonwealth of the Northern Mariana Islands (CNMI),  Guam, Puerto Rico, and the Virgin Islands—we used demographic data  from the Census Bureau and disease mortality data from the Centers for  Disease Control and Prevention (CDC). Except for Puerto Rico, interim  and supplemental censuses to the decennial census are not performed for  the insular areas. Therefore, 2000 census data for all insular areas and  states were used for consistency. Reliable data for the incidence of disease  are not collected for all insular areas. CDC’s 2002 natality and mortality  report provided health indicator data except where the number of cases  was too few to provide reliable estimates.
To identify key federal sources of health care funding to the insular areas  we reviewed the Census Bureau’s Consolidated Federal Funds Report and  conducted interviews with representatives from insular areas, six agencies  of the Department of Health and Human Services (HHS), the Department  of the Interior’s Office of Insular Affairs (DOI-OIA), and the White House  Office of Intergovernmental Affairs. We defined health care funding as  federal funds provided to support directly delivered health care, health  data collection, disease prevention, and other health-related activities. On  the basis of the discussions, we focused our work on the following key  sources of funding: Medicare, Medicaid, and SCHIP, in addition to grants  from three HHS agencies—CDC, the Health Resources and Services  Administration (HRSA), and the Substance Abuse and Mental Health  Services Administration (SAMHSA)—and DOI.
We collected federal health expenditure data for the states and the insular  areas. We selected five states for comparison to insular areas—Alaska,  Hawaii, Mississippi, West Virginia, and Wyoming. States were selected on  the basis of one or more criteria: geographic remoteness, low Medicare  spending, and high federal Medicaid matching rate.
We analyzed data provided by each agency and by the insular areas to  identify the composition of federal health care funding to insular areas and  growth in the awards from fiscal year 1999 through 2003. We compared  insular area data with funding to the states as a whole, and to select  individual states. We also analyzed expenditures per capita or by  beneficiaries of respective programs, where available and consistent.
subsections: section_title: Data Reliability
paragraphs: For the key sources identified, we obtained comprehensive health  expenditure data for federal fiscal years 1999 through 2003 from the  respective agencies. To assess the reliability of the program expenditure  data, we reviewed relevant documentation, interviewed knowledgeable  agency officials about the data, and conducted electronic data testing. To  assess the reliability of HHS and DOI-OIA data, we talked with officials  about data quality control procedures and reviewed relevant  documentation. We determined the data were sufficiently reliable for the  purposes of this report.
We conducted our work from October 2004 through September 2005 in  accordance with generally accepted government auditing standards.
section_title: Appendix II: Changes in Insular Area Health Care Funding Proportions over Time
paragraphs: When considered in the aggregate, health care funding in the five largest  insular areas varied little in terms of the proportion of funding attributable  to various sources for fiscal years 1999 through 2003. For each of the  years, Medicare represented about three-quarters of total funding,  followed by Medicaid and HHS grants, which each represented about one- tenth of the total. Funding from SCHIP and DOI grants together  represented 5 percent or less of total funding. However, Puerto Rico’s  comparatively large population masks much of the variation in funding  sources that exists in the other insular areas. These areas, particularly  those in the Pacific, are considerably more reliant upon grant funding,  which can fluctuate from year to year. (See fig. 8 through 13 and tables 4  through 9.)
section_title: Appendix III: Characteristics of Insular Areas’ Medicaid Programs
paragraphs: To obtain Medicaid federal matching funds, state and insular area  programs are to meet broad criteria related to eligibility, including  categorical, income, and resource requirements. However, the insular  areas vary in the extent to which their eligibility standards comply with  the federal standards. For example, Guam, Puerto Rico, and the Virgin  Islands use the same broad federal categories established in statute;  however, the levels two of these areas use to determine income eligibility  are based on locally established poverty levels rather than the federal  poverty level (FPL). Table 10 compares the federal categorical and income  eligibility standards to those in the insular areas.
In addition to eligibility requirements, Medicaid mandates coverage for  certain services. However, as shown in table 3, none of the insular areas  provides coverage for all the mandatory services. Nonetheless, each  insular area, like the states, has chosen to add optional benefits under the  statute, with most providing coverage for outpatient prescription drugs,  clinic services, dental and eye care, and physical therapy. (See table 11.)
section_title: Appendix IV: Comments from the Department of the Interior
section_title: Appendix V: Comments from American Samoa
section_title: Appendix VI: Comments from the Commonwealth of the Northern Mariana Islands
section_title: Appendix VII: Comments from the Commonwealth of Puerto Rico
section_title: Appendix VIII: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: In addition to the contact named above, Susan T. Anthony, Assistant  Director, Gerardine Brennan, Richard Lipinski, Michaela M. Monaghan,  Mary Reich, and Margaret J. Weber made key contributions to this report.