Medicaid Financing: Long-Standing Concerns about Inappropriate State Arrangements Support Need for Improved Federal Oversight
Published: 2007-11-01T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Medicaid, a joint federal-state program, financed the health care for about 60 million low-income people in fiscal year 2005. States have considerable flexibility in deciding what medical services and individuals to cover and the amount to pay providers, and the federal government reimburses a proportion of states' expenditures according to a formula established by law. The Centers for Medicare & Medicaid Services (CMS) is the federal agency responsible for overseeing Medicaid. Growing pressures on federal and state budgets have increased tensions between the federal government and states regarding this program, including concerns about whether states were appropriately financing their share of the program. GAO's testimony describes findings from prior work conducted from 1994 through March 2007 on (1) certain inappropriate state Medicaid financing arrangements and their implications for Medicaid's fiscal integrity, and (2) outcomes and transparency of a CMS oversight initiative begun in 2003 to end such inappropriate arrangements.
section_title: What GAO Found
paragraphs: GAO has reported for more than a decade on varied financing arrangements that inappropriately increase federal Medicaid matching payments. In reports issued from 1994 through 2005, GAO found that some states had received federal matching funds by paying certain government providers, such as county operated nursing homes, amounts that greatly exceeded established Medicaid rates. States would then bill CMS for the federal share of the payment. However, these large payments were often temporary, since some states required the providers to return most or all of the amount. States used the federal matching funds obtained in making these payments as they wished. Such financing arrangements had significant fiscal implications for the federal government and states. The exact amount of additional federal Medicaid funds generated through these arrangements is unknown, but was in the billions of dollars. Because such financing arrangements effectively increase the federal Medicaid share above what is established by law, they threaten the fiscal integrity of Medicaid's federal and state partnership. They shift costs inappropriately from the states to the federal government, and take funding intended for covered Medicaid costs from providers, who do not under these arrangements retain the full payments. In 2003, CMS began an oversight initiative that by August 2006 resulted in 29 states ending inappropriate financing arrangements. Under the initiative, CMS sought satisfactory assurances that a state was ending financing arrangements that the agency found to be inappropriate. According to CMS, the arrangements had to be ended because the providers did not retain all payments made to them but returned all or a portion to the states. GAO reported in 2007 that, although CMS's initiative was consistent with Medicaid payment principles, it was not transparent in implementation. CMS had not used any of the means by which it normally provides states with information about Medicaid program requirements, such as the published state Medicaid manual, standard letters issued to all state Medicaid directors, or technical guidance manuals. Such guidance could be helpful to inform states about the specific standards it used for reviewing and approving states' financing arrangements. In May 2007, CMS issued a final rule that would limit Medicaid payments to government providers' costs. GAO has not reported on CMS's rule.

section_title: Letter
paragraphs: I am pleased to be here today as you explore recent regulatory actions of  the administration related to the Medicaid program and the potential  effects of these actions on patients, providers, and states. Medicaid, a joint  federal and state program that covered about 60 million people in fiscal  year 2005, fulfills a crucial role in providing health coverage for a variety  of vulnerable populations, including certain low-income children, families,  and individuals who are aged or disabled. Ensuring the program’s long- term sustainability is therefore very important.
The federal government and the states share responsibilities for financing  and administering Medicaid. Within broad federal requirements, states  have considerable flexibility in deciding what medical services and  individuals to cover and the amount to pay providers, and the federal  government reimburses a proportion of states’ expenditures according to a  formula established by law. The Centers for Medicare & Medicaid  Services (CMS) is the federal agency responsible for overseeing states’  Medicaid programs and ensuring the propriety of expenditures for which  states seek federal reimbursement. Total Medicaid expenditures are  significant and growing, totaling an estimated $317 billion in fiscal year  2005, and are expected to continue to grow.
Growing pressures on federal and state budgets have increased tensions  between the federal government and the states regarding Medicaid. In  recent years, tensions have arisen regarding CMS’s actions in overseeing  the appropriateness of provider payments for which states have sought  federal reimbursement, including whether states were appropriately  financing their share, that is, the nonfederal share of these payments.  Starting in the early 1990’s and as recently as 2005, we and others have  reviewed aspects of inappropriate Medicaid financing arrangements in  some states, often involving supplemental payments made to government  providers that were above and beyond states’ typical Medicaid payment  rates. We have also reviewed CMS’s oversight of such arrangements, most  recently reporting in March 2007 on an initiative started in 2003 to end  inappropriate arrangements. In May 2007 CMS issued a final rule that  would affect state Medicaid financing arrangements. In my testimony  today I will summarize and describe our findings (1) on past inappropriate  state Medicaid financing arrangements, including their implications for the  fiscal integrity of the Medicaid program; and (2) on the outcomes and  transparency of CMS’s 2003 initiative, which provides context for  considering the effect of the May rule on various stakeholders. My  testimony is based on our previous work assessing various Medicaid  financing arrangements and federal oversight of these arrangements. We  conducted this body of work from June 1993 through March 2007. We have  not reported on CMS’s May 2007 rule. We conducted our work in  accordance with generally accepted government auditing standards.
In summary, we have reported for more than a decade on varied financing  arrangements that inappropriately increase federal Medicaid matching  payments. In reports issued from 1994 through 2005, we reported on  various arrangements whereby states received federal matching funds by  paying certain government providers, such as county owned or operated  nursing homes, amounts that greatly exceeded established Medicaid rates.  The large payments were often temporary since some states required the  government providers to return all or most of the money to the states.  States used the federal matching funds received for these payments— which essentially made a round-trip from the states to providers and back  to the states—at their own discretion. Such financing arrangements had  significant fiscal implications for the federal government and states. The  exact amount of additional federal Medicaid funds generated through  these arrangements is not known, but was in the billions of dollars.  Despite congressional and CMS action taken during those years to limit  such arrangements, we found in recent years that improved federal  oversight of such arrangements was needed. Because such financing  arrangements effectively increase the federal Medicaid share above what  is established by law, they threaten the fiscal integrity of Medicaid’s  federal and state partnership. They shift costs inappropriately from the  states to the federal government, and take funding intended for Medicaid  providers, who do not under these arrangements retain the full payments.
CMS’s oversight initiative, started in 2003 to end inappropriate state  financing arrangements, by August 2006 had resulted in 29 states ending  financing arrangements in which providers did not retain the supplemental  payments they received. Although we found that CMS’s initiative was  consistent with Medicaid payment principles, we also found that more  transparency was needed regarding the way in which CMS was  implementing its initiative and the review standards it was using to end  certain financing arrangements. For example, to inform states about the  specific standards it used for reviewing and approving states’ financing  arrangements under its new initiative, CMS had not used any of the means  by which it typically provides information to states about the Medicaid  program, such as its published state Medicaid manual, standard letters  issued to all state Medicaid directors, or technical guidance manuals.  Consequently, states were concerned about standards that were applied in  CMS’s review of their arrangements and the consistency with which states  were treated. These observations provide some context for the  controversy surrounding CMS’s May 2007 rule. We have not reported on  CMS’s May 2007 rule or other rules related to Medicaid financing issued  this year. The extent to which the rule will address concerns about the  transparency of CMS’s initiative and review standards will depend on how  CMS implements it.
subsections: section_title: Background
paragraphs: Title XIX of the Social Security Act establishes Medicaid as a joint federal- state program to finance health care for certain low-income children,  families, and individuals who are aged or disabled. Medicaid is an open- ended entitlement program, under which the federal government is  obligated to pay its share of expenditures for covered services provided to  eligible individuals under each state’s federally approved Medicaid plan.  States operate their Medicaid programs by paying qualified health care  providers for a range of covered services provided to eligible beneficiaries  and then seeking reimbursement for the federal share of those payments.
CMS has an important role in ensuring that states comply with statutory  Medicaid payment principles when claiming federal reimbursements for  payments made to institutional and other providers who serve Medicaid  beneficiaries. For example, Medicaid payments must be “consistent with  efficiency, economy, and quality of care,” and states must share in  Medicaid costs in proportions established according to a statutory  formula.
Within broad federal requirements, each state administers and operates its  Medicaid program in accordance with a state Medicaid plan, which must  be approved by CMS. A state Medicaid plan details the populations a  state’s program serves, the services the program covers (such as  physicians’ services, nursing home care, and inpatient hospital care), and  the rates of and methods for calculating payments to providers. State  Medicaid plans generally do not detail the specific arrangements a state  uses to finance the nonfederal share of program spending. Title XIX of the  Social Security Act allows states to derive up to 60 percent of the  nonfederal share from local sources, as long as the state itself contributes  at least 40 percent.
Over the last several years, CMS has taken a number of steps to help  ensure the fiscal integrity of the Medicaid program. These include making  internal organizational changes that centralize the review of states’  Medicaid financing arrangements and hiring additional staff to review each  state’s Medicaid financing. The agency also published in May 2007 a final  rule related to Medicaid payment and financing. This rule would, among  other things, limit payments to government providers to their cost of  providing Medicaid services. The Secretary is prohibited by law from  implementing the rule until May 25, 2008.
section_title: Concerns about Certain Medicaid Financing Arrangements that Undermine Medicaid’s Fiscal Integrity Are Long-Standing
paragraphs: From 1994 to 2005, we have reported numerous times on a number of  financing arrangements that create the illusion of a valid state Medicaid  expenditure to a health care provider. Payments under these arrangements  have enabled states to claim federal matching funds regardless of whether  the program services paid for had actually been provided. As various  schemes have come to light, Congress and CMS took several actions from  1987 through 2002, through law and regulation, to curtail them (see   table 1).
Many of these arrangements involve payment arrangements between the  state and government-owned or government-operated providers, such as  local-government-operated nursing homes. They also involved  supplemental payments—payments states made to these providers  separate from and in addition to those made at a state’s standard Medicaid  payment rate. The supplemental payments connected with these  arrangements were illusory, however, because states required these  government providers to return part or all of the payments to the states.  Because government entities were involved, all or a portion of the  supplemental payments could be returned to the state through an  intergovernmental transfer, or IGT. Financing arrangements involving  illusory payments to Medicaid providers have significant fiscal  implications for the federal government and states. The exact amount of  additional federal Medicaid funds generated through these arrangements  is not known, but was in the billions of dollars. For example, a 2001  regulation to curtail misuse of the UPL regulation was estimated to have  saved the federal government approximately $17 billion from fiscal year  2002 through fiscal year 2006. In 2003, we designated Medicaid to be a  program at high risk of mismanagement, waste, and abuse, in part due to  concerns about states’ use of inappropriate financing arrangements.
subsections: section_title: Inappropriate Medicaid Financing Arrangements Undermine Medicaid’s Fiscal Integrity
paragraphs: States’ use of these creative financing mechanisms undermined the  federal-state Medicaid partnership as well as the program’s fiscal integrity  in three ways. First, inappropriate state financing arrangements effectively  increased the federal matching rate established under federal law by  increasing federal expenditures while state contributions remained  unchanged or even decreased. Figure 1 illustrates a state’s arrangement in  place in 2004 in which the state increased federal expenditures without a  commensurate increase in state spending. In this case, the state made a  $41 million supplemental payment to a local-government hospital. Under  its Medicaid matching formula, the state paid $10.5 million and CMS paid  $30.5 million as the federal share of the supplemental payment. After  receiving the supplemental payment, however, the hospital transferred  back to the state approximately $39 million of the $41 million payment,  retaining just $2 million. Creating the illusion of a $41 million hospital  payment when only $2 million was actually retained by the provider  enabled the state to obtain additional federal reimbursements without  effectively contributing a nonfederal share—in this case, the state actually  netted $28.5 million as a result of the arrangement.
Second, CMS had no assurance that these increased federal matching  payments were retained by the providers and used to pay for Medicaid  services. Federal Medicaid matching funds are intended for Medicaid- covered services for the Medicaid-eligible individuals on whose behalf  payments are made. Under these arrangements, however, payments for  such Medicaid-covered services were returned to the states which could  then use the returned funds at their own discretion. In 2004, we examined  how six states with large supplemental payment financing arrangements  involving nursing homes used the federal funds they generated. As in the  past, some states deposited excessive funds from financing arrangements  into their general funds, which may or may not be used for Medicaid  purposes. Table 2 provides further information on how states used their  funds from supplemental payment arrangements, as reported by the six  states we reviewed in 2004.
Third, these state financing arrangements undermined the fiscal integrity  of the Medicaid program because they enabled states to make payments to  government providers that significantly exceeded their costs. In our view,  this practice was inconsistent with the statutory requirement that states  adopt methods to ensure that Medicaid payments are consistent with  economy and efficiency.
section_title: CMS Oversight Initiative to End State Financing Arrangements Lacked Transparency
paragraphs: Our March 2007 report on a recent CMS oversight initiative to end certain  financing arrangements where providers did not retain the payments  provides context for CMS’s May rule. Responding to concerns about  states’ continuing use of creative financing arrangements to shift costs to  the federal government, CMS has taken steps starting in August 2003 to  end inappropriate state financing arrangements by closely reviewing state  plan amendments on a state-by-state basis. As a result of CMS initiative,  from August 2003 through August 2006, 29 states ended one or more  arrangements for financing supplemental payments, because providers  were not retaining the Medicaid payments for which states had received  federal matching funds.
We found CMS’s actions under its oversight initiative to be consistent with  Medicaid payment principles—for example, that payment for services be  consistent with efficiency and economy. We also found, however, that  CMS’s initiative to end inappropriate financing arrangements lacked  transparency, in that CMS had not issued written guidance about the  specific approval standards for state financing arrangements. CMS’s  initiative was a departure from the agency’s past oversight approach,  which did not focus on whether individual providers were retaining the  supplemental payments they received. In contacting the 29 states that  ended a financing arrangement from August 2003 through August 2006  under the initiative, only 8 states reported they had received any written  guidance or clarification from CMS regarding appropriate and  inappropriate financing arrangements. CMS had not used any of the means  by which it typically provides information to states about the Medicaid  program, such as its published state Medicaid manual, standard letters  issued to all state Medicaid directors, or technical guidance manuals, to  inform states about the specific standards it used for reviewing and  approving states’ financing arrangements. State officials told us it was not  always clear what financing arrangements CMS would allow and why  arrangements approved in the past would no longer be approved. Twenty- four of 29 states reported that CMS had changed its policy regarding  financing arrangements, and 1 state challenged CMS’s disapproval of its  state plan amendment, in part on the grounds that CMS changed its policy  regarding payment arrangements without rule making. The lack of  transparency in CMS’s review standards raised questions about the  consistency with which states had been treated in ending their financing  arrangements. We consequently recommended that CMS issue guidance to  clarify allowable financing arrangements.
Our recommendation for CMS to issue guidance for allowable financing  arrangements paralleled a recommendation we had made in earlier work  reviewing states’ use of consultants on a contingency-fee basis to  maximize federal Medicaid revenues. Our work found problematic  projects where claims for federal matching funds appeared to be  inconsistent with CMS’s policy or with federal law, or that—as with  inappropriate supplemental payment arrangements—undermined  Medicaid’s fiscal integrity. Several factors contributed to the risk of state  projects. Many were in areas where federal requirements had been  inconsistently applied, evolving, or not specific. We recommended that  CMS establish or clarify and communicate its policies in these areas,  including supplemental payment arrangements. CMS responded that  clarifying guidance was under development for targeted case management,  rehabilitation services, and supplemental payment arrangements.
We have recently initiated work to examine CMS’s current oversight of  certain types of state financing arrangements. We have not reported on  CMS’s May 2007 rule or other rules related to Medicaid financing issued  this year. The extent to which the rule will address concerns about the  transparency of CMS’s initiative and review standards will depend on how  CMS implements it.
section_title: Concluding Observations
paragraphs: As the nation’s health care safety net, the Medicaid program is of critical  importance to beneficiaries and the providers that serve them. The federal  government and states have a responsibility to administer the program in a  manner that assures expenditures benefit those low-income people for  whom benefits were intended. With annual expenditures totaling more  than $300 billion per year and growing, accountability for the significant  program expenditures is critical to providing those assurances. The  program’s long-term fiscal sustainability is important for beneficiaries,  providers, states, and the federal government.
For more than a decade, we have reported on various methods that states  have used to inappropriately maximize federal Medicaid reimbursement,  and we have made recommendations to end these inappropriate financing  arrangements. Supplemental payments involving government providers  have resulted in billions of excess federal dollars for states, yet  accountability for these payments—assurances that they are retained by  providers of Medicaid services to Medicaid beneficiaries—has been  lacking. CMS has taken important steps in recent years to improve its  financial management of Medicaid. Yet more can be done to enhance the  transparency of CMS oversight. Consequently, we believe our  recommendations regarding the clarification and communication of  allowable financing arrangements remain valid.
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 contact Marjorie  Kanof at (202) 512-7114 or Kanofm@gao.gov. Katherine Iritani, Assistant  Director; Ted Burik; Tim Bushfield; Tom Moscovitch; and Terry Saiki  made key contributions to this statement.
section_title: Related GAO Products
paragraphs: Medicaid Financing: Federal Oversight Initiative Is Consistent with  Medicaid Payment Principles but Needs Greater Transparency.   GAO-07-214. Washington, D.C.: March 30, 2007.
Medicaid Financial Management: Steps Taken to Improve Federal  Oversight but Other Actions Needed to Sustain Efforts. GAO-06-705.  Washington, D.C.: June 22, 2006.
Medicaid: States’ Efforts to Maximize Federal Reimbursements  Highlight Need for Improved Federal Oversight. GAO-05-836T.  Washington, D.C.: June 28, 2005.
Medicaid Financing: States’ Use of Contingency-Fee Consultants to  Maximize Federal Reimbursements Highlights Need for Improved  Federal Oversight. GAO-05-748. Washington, D.C.: June 28, 2005.
High-Risk Series: An Update. GAO-05-207. Washington, D.C.:   January 2005.
Medicaid: Intergovernmental Transfers Have Facilitated State  Financing Schemes. GAO-04-574T. Washington, D.C.: March 18, 2004.
Medicaid: Improved Federal Oversight of State Financing Schemes Is  Needed. GAO-04-228. Washington, D.C.: February 13, 2004.
Major Management Challenges and Program Risks: Department of  Health and Human Services. GAO-03-101. Washington, D.C.:   January 2003.
Medicaid: HCFA Reversed Its Position and Approved Additional State  Financing Schemes. GAO-02-147. Washington, D.C.: October 30, 2001.
Medicaid: State Financing Schemes Again Drive Up Federal Payments.  GAO/T-HEHS-00-193. Washington, D.C.: September 6, 2000.
Medicaid: States Use Illusory Approaches to Shift Program Costs to  Federal Government. GAO/HEHS-94-133. Washington, D.C.: August 1,  1994.
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