Medicaid: States' Efforts to Maximize Federal Reimbursements Highlight Need for Improved Federal Oversight
Published: 2005-06-28T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Medicaid--the federal-state health care financing program covering almost 54 million low-income people at a cost of $276 billion in fiscal year 2003--is by its size and structure at significant risk of waste and exploitation. Because of challenges inherent in overseeing the program, which is administered federally by the Centers for Medicare & Medicaid Services (CMS), GAO added Medicaid to its list of high-risk federal programs in 2003. Over the years, states have found various ways to maximize federal Medicaid reimbursements, sometimes using consultants paid a contingency fee to help them do so. From earlier work and a report issued today (GAO-05-748), GAO's testimony addresses (1) how some states have inappropriately increased federal reimbursements; (2) some ways states have increased federal reimbursements for school-based Medicaid services and administrative costs; and (3) how states are using contingency-fee consultants to maximize federal Medicaid reimbursements and how CMS is overseeing states' efforts.
section_title: What GAO Found
paragraphs: For many years, GAO has reported on varied financing schemes and questionable methods used by states to increase the federal reimbursements they receive for operating their state Medicaid programs. These schemes and methods can undermine Medicaid's federal-state partnership and threaten its fiscal integrity. For example, some states make large supplemental payments to government-owned or government-operated entities for delivery of Medicaid services while requiring these entities to return the payments to the state. This process creates the illusion of valid expenditures in order to obtain federal reimbursement, effectively shifting a portion of the state's share of program expenditures to the federal government and increasing the federal share beyond that established by formula under law. Medicaid funding is available for local school districts for certain health services for eligible children and for administrative costs. To claim increased federal Medicaid reimbursement, however, some states and school districts have used methods lacking sufficient controls to ensure that claims were legitimate. GAO also found funding arrangements among schools, states, and private consulting firms where some states retained up to 85 percent of reimbursements for administrative costs. In some cases, school districts paid contingency fees to consultants. A growing number of states are using consultants on a contingency-fee basis to maximize federal Medicaid reimbursements. As of 2004, 34 states--up from 10 states in 2002--used contingency-fee consultants for this purpose. GAO identified claims in each of five categories of claims from contingency-fee projects that appeared to be inconsistent with current CMS policy, inconsistent with federal law, or that undermined the fiscal integrity of the Medicaid program. Problematic projects often were in categories where federal requirements were inconsistently applied, evolving, or not specific. CMS has taken steps to improve its fiscal management of Medicaid, but a lack of oversight and clear guidance from CMS has allowed states to develop new financing methods or continue existing ones that take advantage of ambiguity and generate considerable additional federal costs.

section_title: Letter
paragraphs: I am pleased to be here today as you explore issues relating to states’  efforts to maximize federal Medicaid reimbursements and how they can  affect the Medicaid program. Medicaid—the federal-state program  financing health care for certain low-income children, families, and  individuals who are aged or disabled—covered nearly 54 million people at  an estimated total cost of $276 billion in federal fiscal year 2003. 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. Congress has structured Medicaid  as a shared financial 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 within broad federal guidelines. We have previously  reported that the challenges inherent in overseeing a program of  Medicaid’s size, growth, and diversity put the program at high risk for  waste, abuse, and exploitation. In 2003, we added Medicaid to our list of  high-risk federal programs.
States can design and administer their Medicaid programs in a manner that  helps them ensure that they receive the maximum allowable federal share  of expenditures they incur for covered services provided to eligible  beneficiaries under a CMS-approved state Medicaid plan, as long as they  do so within the framework of federal law, regulation, and CMS policy. To  that end, states can employ consultants to assist them in performing a  number of valid Medicaid-related functions that may help them to identify  and implement ways to obtain additional federal funds or that may help  save money for both the federal government and states. Consultants, for  example, can help identify claims that are inappropriately paid or that are  subject to recovery from other payers. States may choose to pay  consultants on a contingency-fee basis (that is, a percent of the additional  federal reimbursements they generate for the state) to develop various  types of reimbursement-maximizing projects. In the current environment  of steadily rising Medicaid costs straining federal and state budgets, states’  use of contingency-fee consultants to maximize federal reimbursement  can be problematic if controls are inadequate to ensure that additional  federal reimbursements are allowable Medicaid expenditures. We have  earlier reported on (1) certain types of financing schemes that involved  some states making illusory payments to government-owned or  government-operated entities such as nursing homes or hospitals, often  through a mechanism known as intergovernmental transfers (IGTs), to  obtain increased federal reimbursements and (2) concerns with practices  used by states and school districts to boost federal payments for school- based services. As part of our body of work on Medicaid financing issues,  today we are releasing a report, undertaken at the Chairman’s request, that  addresses states’ use of contingency-fee consultants to maximize federal  Medicaid reimbursements.
For today’s hearing, you asked us to address issues we have identified in  our past and current work concerning some reimbursement-maximizing  strategies used by some states and CMS’s oversight of them. In my  testimony, I will describe: (1) how, over the years, some states have  inappropriately increased federal reimbursements, sometimes using IGTs,  through varied state financing schemes; (2) how states have used  questionable methods to increase federal reimbursements for school- based Medicaid services and administrative costs and the status of CMS’s  actions to improve oversight in this area; and (3) how states are using  contingency-fee consultants to maximize federal Medicaid  reimbursements and how CMS oversees states’ reimbursement- maximizing strategies. My testimony is based on several previous reports  and testimonies, including the report we are issuing today, assessing  states’ Medicaid financing methods and federal oversight of them. The  work that produced these reports and testimonies was conducted from  June 1993 through June 2005 in accordance with generally accepted  government auditing standards.
In summary, for many years we have reported on the varied financing  schemes and questionable methods that states have used to increase the  federal reimbursements they receive for operating their state Medicaid  programs. In our view, these methods can undermine the Medicaid  federal-state partnership and threaten the fiscal integrity of the program.  We previously reported that:    Some states have used IGTs to make large supplemental payments to  government-owned or government-operated providers, which have greatly  exceeded the established Medicaid payment rates. Such supplemental  payments create the illusion of valid expenditures for services delivered to  Medicaid beneficiaries and allow states to obtain the federal  reimbursement, only to have the local government providers, under  agreements with the states, transfer the excessive federal and state  payments back to the state. As a result, some states are able to shift a  portion of their share of program expenditures to the federal government,  essentially increasing the federal matching rate beyond that established  under federal law.
Some states and school districts have used questionable methods to  increase federal Medicaid reimbursement for Medicaid health services and  administrative costs, that is, methods that lacked sufficient controls to  ensure that the claims were legitimate. Medicaid funding is available for  certain health services provided by local school districts, such as  diagnostic screening and physical therapy for eligible children, including  those with disabilities. Medicaid reimbursement is also available for the  administrative costs of providing school-based Medicaid services. We  found funding arrangements in some states among schools, states, and  private consulting firms that resulted in schools’ receiving a small portion  of the Medicaid reimbursements, while some states retained up to   85 percent of Medicaid reimbursements for school-based health services  or administrative claims. Moreover, some school districts paid  contingency fees to the private consultants who assisted them in preparing  and submitting Medicaid claims, further reducing the net amount the  schools received.
As we are reporting today, a growing number of states are using  consultants on a contingency-fee basis to maximize federal Medicaid  reimbursements. As of 2004, 34 states—up from 10 states in 2002—used  contingency-fee consultants for this purpose. We identified some claims  from contingency-fee projects that appear to be inconsistent with current  CMS policy and some that were inconsistent with federal law; we also  found claims that undermined the fiscal integrity of the Medicaid program.  In Georgia and Massachusetts, where we focused our review of specific  projects, selected projects that involved the assistance of contingency-fee  consultants generated a significant amount of additional federal  reimbursements for the states: from fiscal year 2000 through 2004, an  estimated $1.5 billion for Georgia and nearly $570 million for  Massachusetts. For those additional reimbursements, Georgia paid its  consultant about $82 million in contingency fees, and Massachusetts paid  its consultants about $11 million in contingency fees. Just to be clear: any  state’s use of consultants—including contingency-fee consultants—or any  associated growth in federal reimbursements, is not problematic, in and of  itself. However, we identified concerns in each of the five categories of  claims where we reviewed the states’ contingency-fee projects:  supplemental payment arrangements, school-based services, targeted case  management, rehabilitation services, and administrative costs, in either  Georgia, Massachusetts, or both states. We found that problematic  projects often tended to be in areas of Medicaid claims where federal  requirements were inconsistently applied, evolving, or not specific. The  lack of clear CMS guidance has allowed states to develop new financing  arrangements, or to continue existing ones, that take advantage of  ambiguity and result in considerable additional costs to the federal  government.
We believe that the continuing problems we have reported in several high- risk categories of Medicaid claims illustrate not only the need to improve  oversight of claims stemming from contingency-fee projects, but also the  urgent need for CMS to address certain issues in its overall financial  management and oversight of Medicaid. In our report issued today, we are  reiterating certain recommendations we have previously made to Congress  and to the Administrator of CMS that remain open, as well as new ones to  the Administrator to improve the financial management and oversight, and  fiscal integrity, of the Medicaid program.
In commenting on a draft of the report issued today, CMS stated that it has  already substantially met our recommendations. While acknowledging that  improper Medicaid payments had unquestionably occurred, the agency  provided detailed information to support why it believes that it (1) was  already aware of the concerns identified in projects we examined and   (2) has taken sufficient action to address these concerns and our related  GAO recommendations. In our view, however, CMS has not sufficiently  identified or addressed the concerns that we identified, and we believe  CMS needs to do more to identify problematic claims resulting from  contingency-fee projects sooner, before large reimbursements have been  made to states. We continue to believe that CMS needs to do more to  clarify, communicate, and consistently apply its policies concerning  certain high-risk areas of the Medicaid program.
subsections: section_title: Background
paragraphs: Title XIX of the Social Security Act authorizes federal funding to states for  Medicaid, which finances health care for certain low-income children,  families, and individuals who are aged or disabled. Although states have  considerable flexibility in designing and operating their Medicaid  programs, they must comply with federal requirements specified in  Medicaid statute and regulation. For example, states must provide  methods to ensure that payments for services are consistent with  economy, efficiency, and quality of care. Medicaid is an entitlement  program: 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.
Our prior and current work addresses five categories of Medicaid claims  where we are aware that states have reimbursement-maximizing  strategies. Our current work in particular concentrated on these five  categories because—on the basis of factors such as nationwide growth in  dollars claimed, the results of our past reviews, and work by HHS’s Office  of Inspector General (OIG) to assess the appropriateness of claims in  these categories—we judged them to be of particularly high risk. Over the  past few years, states’ claims in some of these categories have grown  significantly in dollar amounts. The five categories of claims we examined,  and recent trends in claimed expenditures, are described in table 1.
section_title: States Have Used Intergovernmental Transfers to Facilitate Financing Schemes That Inappropriately Increase Federal Medicaid Reimbursements
paragraphs: For many years, states have used varied financing schemes, sometimes  involving IGTs, to inappropriately increase federal Medicaid  reimbursements. 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 transactions create the illusion of valid expenditures  for services delivered by local-government providers to Medicaid-eligible  individuals and enable states to claim large federal reimbursements. 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 for  non-Medicaid purposes.
As various schemes involving IGTs have come to light, Congress and CMS  have taken actions to curtail them, but as one approach has been  restricted, others have often emerged. Table 2 describes some of the  states’ financing schemes over the years and how Congress and CMS have  responded to them.
A leading variant of these illusory financing arrangements today involves  states’ taking advantage of Medicaid’s upper payment limit (UPL)  provisions. Although states are allowed, under law and CMS policy, to  claim federal reimbursements for supplemental payments they make to  providers up to the UPL ceilings, we have reported earlier that payments  in excess of the provider’s costs that are not retained by the provider as  reimbursement for services actually provided are inconsistent with  Medicaid’s federal-state partnership and fiscal integrity. For example, we  have reported that by paying nursing homes and hospitals owned by local  governments much more than the established Medicaid payment rate and  requiring the providers to return, through IGTs, the excess state and  federal payments to the state, states obtain excessive federal Medicaid  reimbursements while their own state expenditures remain unchanged or  even decrease. Such round-trip payment arrangements can be  accomplished via electronic wire transfer in less than an hour. States have  then used the returned funds to pay their own share of future Medicaid  spending or to fund non-Medicaid programs.
Problems with excessive supplemental payment arrangements remain,  despite congressional and CMS action to curtail financing schemes. For  example, in our current review of states’ use of contingency-fee  consultants, we found an example in Georgia that illustrates how current  law and policy continue to allow states to generate excessive federal  reimbursements beyond established Medicaid provider payments for  covered services. Georgia and its consultant developed five UPL  arrangements using IGTs—one each for local-government-operated  inpatient hospitals, outpatient hospitals, nursing homes and for state- owned hospitals and nursing homes. Over the 3-year period of state fiscal  years 2001 through 2003, the state made supplemental payments totaling   $2.0 billion to nursing homes and hospitals operated by local governments  (see fig. 1). A sizable share of the $2.0 billion payments was illusory,  however. In reality, the nursing homes and hospitals netted only $357  million because they had initially transferred $1.7 billion to the state  Medicaid agency, through IGTs, under an agreement with that agency. The  state combined this $1.7 billion with $1.2 billion in federal funds, which  represented the estimated federal share of its supplemental payments to  local-government facilities of $2.0 billion. The state thus had a funding  pool of $2.9 billion at its disposal. From this pool, the state made the   $2.0 billion in supplemental payments to local-government providers and  retained $844 million to offset its other Medicaid expenditures.
In our view, the inappropriate use of IGTs in schemes such as UPL  financing arrangements violates the fiscal integrity of Medicaid’s federal- state partnership 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. We previously  estimated that one state effectively increased the federal 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 reimbursements 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, we previously 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 provide for methods that ensure that  Medicaid payments are consistent with economy and efficiency. We  previously reported that, in one state, the state’s proposed scheme  increased the daily federal payment per Medicaid resident from $53 to  $670 in six local-government-operated nursing homes.
section_title: Questionable Methods Have Boosted Federal Reimbursements for School-Based Claims
paragraphs: Another category of claims where states have used questionable practices  to maximize federal reimbursements is services provided to children in  schools and associated administrative costs. Medicaid is authorized to  cover services to, for example, Medicaid-eligible children with disabilities  who may need diagnostic, preventive, and rehabilitative services; speech,  physical and occupational therapies; and transportation. School districts  may also receive Medicaid reimbursement for the administrative costs of  providing school-based Medicaid services. Our work in this area has  addressed claims for Medicaid school-based health services and  administration. In 1999, we found a need for federal oversight of growing  Medicaid reimbursements to states for Medicaid school-based  administrative services, including outreach activities to enroll children in  Medicaid. In April 2000, we reported that Medicaid expenditures for  school-based health services totaled about $1.6 billion for services  provided by schools in 45 states and the District of Columbia, while  Medicaid administrative expenditures were about $712 million for costs  billed by schools in 17 states. We found that some of the methods used by  school districts and states to claim reimbursement for school-based health  services did not ensure that the services paid for were provided: some  claims, for example, were made solely on the basis of at least one day’s  attendance in school, rather than on documentation of any actual service  delivery. Methods used by school districts to claim Medicaid  reimbursement failed in some cases to take into account variations in  service needs among children.
With regard to Medicaid school-based administrative costs, we found that  some methods used by school districts and states did not ensure that  administrative activities were properly identified and reimbursed. Poor  controls resulted in improper payments in at least two states, and there  were indications that improprieties could have been occurring in several  other states. We further found that, in some states, funding arrangements  among schools, states, and private consulting firms created adverse  incentives for program oversight and caused schools to receive a small  portion—as little as $7.50 for every $100 in Medicaid claims—of Medicaid  reimbursement for school-based administrative and service claims. We  reported that 18 states retained a total of $324 million, or 34 percent, of  federal funds intended to reimburse schools for their Medicaid  administrative and service claims; for 7 of the states, this amounted to 50  to 85 percent of federal Medicaid reimbursement for school-based health  services claims. In addition, contingency fees, which some school districts  paid to private consultants for their assistance in preparing and submitting  Medicaid claims, ranged from 3 to 25 percent of the federal  reimbursement, further reducing the net amount that schools received.
In response to recommendations we made to the Administrator of CMS,  CMS has clarified guidance for states on submitting claims for school- based administrative activities. Subsequent to our work, HHS OIG  conducted reviews of school-based claims in 18 states from November  2001 through June 2005, several of which have identified issues with the  appropriateness of claims related to consultants’ projects.
In our own most recent work, we determined that Georgia was retaining a  share of the additional federal reimbursements gained from its claims for  Medicaid school-based services. Georgia’s contingency-fee consultant  assisted the state with its Medicaid claims for school-based services in a  project that generated about $54 million in federal Medicaid  reimbursements over the 3 years the consultant was paid and that, on the  basis of state data, we estimate continues to generate about $25 million  annually. As before, we found that the school districts were not receiving  all of the federal Medicaid reimbursements that were generated on their  behalf. According to a state official and documents provided by the state,  the state retained $3.9 million, or 16 percent, of federal reimbursements  that were claimed on behalf of the school districts for state fiscal year  2003, most of which was used to pay its contingency-fee consultant and  about $1 million of which was used to cover the salaries and  administrative costs of the five state employees who administered school- based claims in Georgia.
section_title: States’ Use of Contingency-Fee Consultants to Maximize Federal Reimbursements Highlights Need for Improved Federal Oversight
paragraphs: A growing number of states are using consultants on a contingency-fee  basis to maximize federal Medicaid reimbursements. CMS reported that,  according to a survey it conducted in 2004, 34 states had used consultants  on a contingency-fee basis for this purpose, an increase from 10 states  reported to have such arrangements in 2002. In the 2 states where we  examined selected projects that involved the assistance of contingency-fee  consultants, Georgia and Massachusetts, we found that the projects  generated a significant amount of additional federal reimbursements for  the states: from fiscal year 2000 through 2004, an estimated $1.5 billion in  Georgia and nearly $570 million in Massachusetts. For those additional  reimbursements, Georgia paid its consultant about $82 million in  contingency fees, and Massachusetts paid its consultants about $11 million  in contingency fees. We identified claims from contingency-fee consultant  projects that appear to be inconsistent with current CMS policy and claims  that are inconsistent with federal law; we also identified claims from  projects that undermine Medicaid’s fiscal integrity. Such projects and  resulting problematic claims arose in each of the five categories of claims  that we reviewed in Georgia, Massachusetts, or for some categories, both  states. We observed two factors common to many projects that we believe  increase their risk. First, many projects were in categories of Medicaid  claims where federal requirements for the services have been  inconsistently applied, are evolving, or were not specific. Second, many  projects involved states’ shifting costs to the federal government through  Medicaid reimbursements to other state or local-government entities.
subsections: section_title: Some Contingency-Fee Projects in Georgia and Massachusetts Resulted in Problematic Federal Reimbursements
paragraphs: For the five categories of claims we reviewed where states frequently used  contingency-fee consultants to maximize their federal Medicaid  reimbursements, we identified problematic claims in each category in  either Georgia or Massachusetts or in both states. These projects resulted  in claims that appear to be inconsistent with current CMS policy and that,  for one project, were inconsistent with federal law. We also identified  claims that were inconsistent with the fiscal integrity of the Medicaid  program. I have already discussed our current findings regarding Georgia’s  use of IGTs in UPL supplemental payment arrangements and its project to  increase claims for school-based Medicaid services and administrative  costs. We also reviewed Georgia’s and Massachusetts’s use of contingency- fee consultants to increase federal reimbursements for targeted case  management services, rehabilitation services for mental or physical  disabilities, and states’ claims for administering their Medicaid programs.  In these two states, our findings were most significant in the areas of  targeted case management and rehabilitation services.
subsections: section_title: Targeted Case Management
paragraphs: Georgia and Massachusetts—with the help of their contingency-fee  consultants—developed approaches to maximize federal Medicaid  reimbursements by claiming costs for targeted case management (TCM)  services under state plan amendments that CMS had approved prior to  2002. Georgia’s consultant assisted the state in increasing federal Medicaid  reimbursement for TCM services provided by two state agencies: the  Department of Juvenile Justice and the Division of Family and Children’s  Services. In Massachusetts, contingency-fee consultants helped the state  increase federal reimbursement for TCM services provided by three state  agencies: the Departments of Social Services, Youth Services, and Mental  Health. These case management services in Georgia and Massachusetts  appear integral to the states’ own programs; the states’ laws, regulations,  or policies called for case management services in these programs, and the  case management services were provided to all Medicaid- and non- Medicaid-eligible children served by the programs. More recently, CMS  has denied coverage for comparable services by other states because CMS  determined that the services are an integral component of the state  programs providing the services. For example, in fiscal year 2002, CMS  denied a state plan amendment proposal to cover TCM services in Illinois  and in fiscal year 2004 it found TCM claims in Texas unallowable, in part  because the TCM services claimed for reimbursement were considered  integral to other state programs. As in Georgia and Massachusetts, the  TCM services in Illinois were for children served by the state’s juvenile  justice system. In Texas, such children were served by the state’s child  welfare and foster care system.
In fiscal year 2003, we estimate that Georgia received $17 million in federal  reimbursements for claims for TCM services provided by its two state  agencies, of which about $12 million was for services that appear to be  integral to non-Medicaid programs. In fiscal year 2004, Massachusetts  received an estimated $68 million in federal reimbursements for services  that appear to be integral to non-Medicaid programs in the three state  agencies whose TCM projects were developed by consultants. CMS  officials agreed with our assessment that the claims for TCM services in  these two states were problematic.
section_title: Rehabilitation Services
paragraphs: Our review of projects involving rehabilitation services found concerns  with methods and claims in Georgia. Georgia’s consultant helped the state  increase federal Medicaid reimbursements for rehabilitation services  provided through two state agencies by $58 million during state fiscal  years 2001 through 2003. The consultant suggested that state agencies— which pay private facilities under a per diem rate for providing room and  board, rehabilitation counseling and therapy, educational, and other  services to children in state custody—base their claims for Medicaid  reimbursement on the private facilities’ estimated costs, instead of on  what the state agencies actually paid those facilities. The state agencies  increased their claims for Medicaid reimbursement without increasing  their payments to the facilities. In some cases, the state agencies’ Medicaid  claims for rehabilitation services alone exceeded the amount paid by the  agencies for all the services the facilities provided to children. Specifically,  for 82 of the residential facilities (about 43 percent), the amount the state  Medicaid agency reimbursed the two agencies in state fiscal year 2004  exceeded the total amount these agencies actually paid the residential  facilities for all services, not just rehabilitation services. One facility, for  example, was paid by the Division of Family and Children’s Services $37  per day per eligible child for all services covered by the per diem payment,  but the state agency billed the Medicaid program $62 per day for  rehabilitation services alone. CMS officials agreed with our conclusion  that claims from this contingency-fee project were not in accord with the  statutory requirement that payments be efficient and economical.
section_title: Two Factors Increase Risk of Problematic Claims
paragraphs: During our work we observed two factors that appear to increase the risk  of problematic claims. One factor involved federal requirements that were  inconsistently applied, evolving, or not specific; the second involved  states’ claiming Medicaid reimbursement for services provided by other  state or local-government agencies. Despite CMS’s long-standing concern  about state financing arrangements for both TCM and supplemental  payments, for example, the agency has not issued adequate guidance to  clarify expenditures allowable for federal reimbursement. Federal TCM  and supplemental payment policy for allowable claims in these categories  has evolved over time, and the criteria that CMS applies to determine  whether claims are allowable have been communicated to states primarily  through state-specific state plan amendment reviews or claims  disallowances, rather than through formal guidance or regulation.
Inconsistently applied policy for allowable TCM services. In 2002,  CMS began to deny proposed state plan amendments that sought approval  for Medicaid coverage of TCM services that were the responsibility of  other state agencies. CMS had determined that such arrangements were  not eligible for federal Medicaid reimbursement for several reasons:   (1) the services were typically integral to existing state programs,   (2) the services were provided to beneficiaries at no charge, and   (3) beneficiaries’ choice of providers was improperly limited. However,  CMS approved Georgia’s and Massachusetts’s state plan amendments for  TCM services before 2002. Although CMS has been applying these criteria  to deny new TCM arrangements—for example, in Maryland, Illinois, and  Texas—it has not yet sought to address similar, previously approved TCM  arrangements that are inconsistent with these criteria. CMS regional  officials told us they could not reconsider the TCM claims from two  agencies in Georgia and four in Massachusetts because they were waiting  for new guidance that the agency was preparing. CMS has been working  on new TCM guidance for more than 2 years, according to agency officials.  As of May 2005, however, this guidance had not been issued. CMS’s fiscal  year 2006 budget submission identifies savings that could be achieved by  clarifying allowable TCM services, but CMS had not published a specific  proposal at the time we completed our work.
Evolving policy for allowable supplemental payment arrangements.  For several years, we and others have reported on state financing schemes  that allow states to inappropriately generate federal Medicaid  reimbursement without the state’s paying its full share. Although Congress  and CMS have taken steps to curb these abuses, states can still develop  arrangements enabling them to make illusory payments to gain federal  reimbursements for their own purposes. Recognizing that states can  unduly gain from supplemental payment arrangements, such as UPL  payment arrangements that use IGTs, since fiscal year 2003 CMS has  worked with individual states to address such arrangements. At the same  time, the agency has not issued guidance stating its policy on acceptable  approaches for UPL payment arrangements, specifically the use of IGTs  and the relationship to state share of spending. CMS’s budget for fiscal  year 2006 proposes to achieve federal Medicaid savings by curbing  financing arrangements that have been used by a number of states to  inappropriately obtain federal reimbursements. The specific proposal,  however, had not been published at the time we completed our review.
Unspecified policy on allowable Medicaid rehabilitation payments  to other state agencies. CMS has not issued policy guidance that  addresses situations where Medicaid payments are made by a state’s  Medicaid agency to other state agencies for rehabilitation services. CMS  financial management officials told us that states’ claims for rehabilitation  services posed an increasing concern, in part because officials believed  that states were inappropriately filing claims for services that were the  responsibility of other state programs. CMS does not specify whether  claims for the cost of rehabilitation services that are the responsibility of  non-Medicaid state agencies are allowable. CMS’s fiscal year 2006 budget  submission identifies savings that could be achieved by clarifying  appropriate methods for claiming rehabilitation services. CMS had not  published a specific proposal at the time we completed our review.
The second factor we observed that increased the financial risk to the  federal government of reimbursement-maximizing projects was that the  projects shifted state costs to the federal government by claiming  Medicaid reimbursement for services provided by other non-Medicaid  state or local government agencies. Medicaid reimbursement to  government agencies serving Medicaid beneficiaries is allowable in cases  where the claims apply to covered services and the amounts paid are  consistent with economy and efficiency. However, the projects and  associated claims we reviewed showed that reimbursement-maximizing  projects often involved services and circumstances that Medicaid should  not pay for—such as illusory payments to government providers.
section_title: Problems Illustrate Need to Improve the Financial Management of Medicaid
paragraphs: As we describe in the report issued today, the problems we identified with  states’ Medicaid claims stemming from contingency-fee projects illustrate  the urgent need to address certain issues in CMS’s overall financial  management of the Medicaid program. These issues, however, are not  limited to situations that involve contingency-fee consultants. We have  identified problems with claims in states other than Georgia and  Massachusetts that have undertaken reimbursement-maximizing activities,  without employing consultants, in categories of long-standing concern,  such as supplemental payment arrangements. CMS relies on its standard  financial management controls to identify any unallowable Medicaid  claims that states may submit, including those that might be associated  with reimbursement-maximizing contingency-fee projects. However, CMS  lacks clear, consistent policies to guide the states’ and its own financial  oversight activities. Furthermore, in our previous work on CMS’s financial  management, we found that the agency did not have a strategy for  focusing its resources most effectively on areas of high risk. In our  current work, we found that CMS has known for some time that two high- risk categories we identified—claims generated from consultants paid on a  contingency-fee basis to maximize reimbursements and claims generated  from arrangements where state Medicaid programs are paying other state  agencies or government providers—were problematic. For example, CMS  had listed these two categories on a financial tracking sheet of high-risk  areas as of 2000. At an October 2003 congressional hearing, the CMS  Administrator expressed concern that the Medicaid program was  understaffed and that consultants in the states were “way ahead of” CMS  in helping states take advantage of the Medicaid system.
CMS has undertaken important steps to improve its financial management  of the Medicaid program. A major component of the agency’s initiative is  hiring, training, and deploying approximately 100 new financial analysts,  mainly to regional offices. These analysts are responsible for identifying  state sources of Medicaid funding and contributing to the review of state  budget estimates and expenditure reports. Expectations for CMS’s new  Division of Reimbursement and State Financing and for the 100 new  financial analysts are high and their responsibilities broad. It is too soon,  however, to assess their accomplishments.
section_title: Conclusions
paragraphs: For more than a decade, we and others have reported on the methods  states have used to inappropriately maximize federal Medicaid  reimbursement and have made recommendations to end financing  schemes. CMS has taken important steps in recent years to improve its  financial management. Yet more can be done.
Many of the problematic methods we examined involved categories of  claims where CMS policy has been inconsistently applied, evolving, or  unspecified. They have also involved increasing payments to units of state  and local government—which states have long used to maximize federal  Medicaid funding, in part because IGTs can help facilitate illusory  payments—suggesting that greater CMS attention is needed to payments  among levels of government, regardless of whether consultants are  involved. We believe that it is important to act promptly to curb  opportunistic financing schemes before they become a staple of state  financing and further erode the integrity of the federal-state Medicaid  partnership. Addressing recommendations that remain open from our  prior work on state financing schemes and on CMS’s financial  management could help resolve some of these issues. In addition, in the  report being issued today, we are making new recommendations to the  Administrator of CMS to improve the agency’s oversight of states’ use of  contingency-fee consultants and to strengthen certain of the agency’s  overall financial management procedures. These recommendations  address developing guidance to clarify CMS policy on TCM, supplemental  payment arrangements, rehabilitation services, and Medicaid  administrative costs; ensuring that such guidance is applied consistently  among states; and collecting and scrutinizing information from states  about payments made to units of state and local governments.
Understandably, states that have relied on certain practices to increase  federal funds as a staple for the state share of Medicaid spending are  concerned about the 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 fiscal integrity of the program. States should not be  held solely responsible for developing arrangements that inappropriately  maximize federal reimbursements where policies have not been clear or  clearly communicated or where CMS has known of risks for some time  and has not acted to mitigate them. Without clear and consistent  communication of policies regarding allowable claims in high-risk areas,  such as those for TCM and UPL where billions of dollars are claimed each  year, CMS is at risk of treating states inconsistently and of placing undue  burdens on states to understand federal policy and comply with it.
Mr. Chairman, this concludes my prepared statement. I will be happy to  answer any questions that you or Members of the Committee 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, Ellen M. Smith, Helen Desaulniers, and  Kevin Milne also made key contributions to this testimony.
section_title: Related GAO Products
paragraphs: Medicaid Fnancing: Sates’ Use of Coningency-Fee Consultants to  Maximize Federal Rembursements Highlighs Need for Improved Federal ti Oversight. GAO-05-748. Washington, D.C.: June 28, 2005.
High-Rsk Seres: An Updae. GAO-05-207. Washington, D.C.: January 2005.
Medicaid Program Integrity: Sate and Federal E orts to Prevent and Detect Improper Payments. GAO-04-707. Washington, D.C.: July 16, 2004.
Medicaid: ntergovernmena Transers Have Fac tated State Fnancing  Schemes. GAO-04-574T. Washington, D.C.: March 18, 2004.
Medicaid: mproved Federal Oversight of State Fnancing Schemes Is  Needed. GAO-04-228. Washington, D.C.: February 13, 2004.
Medicaid Fnancial Management: Beter Oversght of State Claims for  Federal Rembursement Needed. GAO-02-300. Washington, D.C.:   February 28, 2002.
Medicaid: HCFA Reversed Is Posi on and Approved Addi onal Stae  Financing Schemes. GAO-02-147. Washington, D.C.: October 30, 2001.
Medicaid: Sae Financng Schemes Agan Drive Up Federal Payments.  GAO/T-HEHS-00-193. Washington, D.C.: September 6, 2000.
Medicaid n Schools: mproper Paymens Demand mprovements in HCFA  Oversight. GAO/HEHS/OSI-00-69. Washington, D.C.: April 5, 2000.
Medicaid n Schools: Poor Oversght and Improper Payments Compromse Potenta Bene t. GAO/T-HEHS/OSI-00-87. Washington, D.C.: April 5, 2000.
Medicaid: Quesionable Practices Boost Federal Payments for School- Based Services. GAO/T-HEHS-99-148. Washington D.C.: June 17, 1999.
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