Medicaid Third-Party Liability: Federal Guidance Needed to Help States Address Continuing Problems
Published: 2006-09-15T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Medicaid, jointly funded by the federal government and the states, finances health care for about 56 million low-income people at an estimated total cost of about $298 billion in fiscal year 2004. Congress intended Medicaid to be the payer of last resort: if Medicaid beneficiaries have another source of health care coverage--such as private health insurance or a health plan purchased individually or provided through an employer--that source, to the extent of its liability, should pay before Medicaid does. This concept is referred to as "third-party liability." When such coverage is used, savings accrue to the federal government and the states. Using data from the U.S. Census Bureau and the states, GAO examined (1) the extent to which Medicaid beneficiaries have private health coverage and (2) problems states face in ensuring that Medicaid is the payer of last resort, including the extent to which the Deficit Reduction Act of 2005 may help address these problems.
section_title: What GAO Found
paragraphs: On the basis of self-reported health coverage information from the Census Bureau's annual Current Population Surveys covering the 2002 through 2004 time period, an average of 13 percent of respondents who reported having Medicaid coverage for the entire year also reported having private health coverage at some time during the same year. This coverage most often was obtained through employment rather than purchased by individuals directly from an insurer: employment-based coverage averaged 11 percent nationwide, while individual coverage averaged 2 percent. Problems states have faced in ensuring that Medicaid is the payer of last resort fall into two general categories: verifying Medicaid beneficiaries' private health coverage and collecting payments from third parties. Officials from 27 of 39 states responding to GAO's request for information about the top three problems they faced reported problems in verifying beneficiaries' private health coverage--a key step states must take to avoid paying claims for which a third party is liable. In cases where states have paid claims before identifying that other coverage was available, states must seek payment for the claims they have already paid. Officials from 35 responding states had problems collecting such payments. Provisions in the Deficit Reduction Act of 2005 require states to have laws in effect that could help address some of the reported problems, but it is too soon to assess the extent to which the problems will be addressed. Further, GAO identified two issues that require resolution in order to aid states in complying with the Deficit Reduction Act's requirements, specifically, (1) the time frame by which states must have their laws in effect, and (2) which entities are subject to certain of the act's requirements. Regarding both issues, officials from the Centers for Medicare & Medicaid Services (CMS), which oversees Medicaid, said in June 2006 that they were considering how to interpret the law and how to best provide guidance to states to help them implement the requirements.

section_title: Letter
paragraphs: Medicaid finances health care for about 56 million low-income individuals,  including children and aged or disabled adults. Jointly funded by the  federal government and the states at an estimated total cost of about   $298 billion in fiscal year 2004, Medicaid has been on our list of high-risk  programs since 2003 because of concerns about the program’s size,  growth, and fiscal oversight, including concerns over whether federal and  state efforts ensure that payments are appropriate. Congress intended  that Medicaid be the payer of last resort; in other words, if a Medicaid  beneficiary also has another source of payment for health services, that  source is to pay instead of Medicaid. Federal law and regulation refer to  these other sources of payment as “third parties,” which may include  private health insurers and employer health plans. In addition, insurers  and employer health plans often hire contractors—such as plan  administrators or benefit managers—to administer part or all of their  health care plans. Some adults may have access to private health coverage  because they may be working and covered by an employer’s health plan  even though they also qualify for Medicaid. In addition, children may  qualify for Medicaid and also be included on a parent’s health plan  provided by the parent’s employer or purchased directly by the parent  from a private insurer. To the extent that private health coverage pays for  health care services instead of Medicaid, savings can accrue to the federal  government and to the states. Such savings can be substantial. States  reported savings of nearly $5.5 billion in fiscal year 2004 from ensuring  that private third parties paid before Medicaid.
In administering their Medicaid programs, states are required to take  reasonable measures to identify other sources of health coverage that  Medicaid beneficiaries may have and to ensure that such parties pay to the  extent of their liability. States have considerable flexibility in designing  and operating their Medicaid programs, although they must comply with  federal requirements. States can typically avoid paying claims for Medicaid  beneficiaries when they have verified that other coverage is available—for  this purpose, knowing which services are covered and the eligibility period  for the other coverage is critical—or they can seek reimbursement from  third parties for previously paid claims for which the third party is legally  liable. In the early 1990s, we reported certain problems that hindered  states’ ability to ensure that beneficiaries’ other health care resources paid  before Medicaid. Some third parties, for example, avoided paying costs  for Medicaid beneficiaries by taking actions that significantly limited  states’ ability to recover the costs. In response to our earlier  recommendations, Congress passed legislation in 1993 to help strengthen  states’ ability to collect from responsible third parties. Recently, however,  Members of Congress have become aware that states are experiencing  difficulties with their third-party efforts. In February 2006, Congress  passed the Deficit Reduction Act of 2005, which contained some  provisions related to Medicaid third-party liability. Because of your  interest that Medicaid not pay for costs that are the responsibility of third  parties, you asked us to review states’ efforts to ensure that Medicaid is  the payer of last resort. Specifically, we examined (1) the extent to which  Medicaid beneficiaries have private health coverage and (2) problems  affecting states’ ability to ensure that Medicaid is the payer of last resort,  including the extent to which the Deficit Reduction Act of 2005 might  address these problems.
To determine the extent to which Medicaid beneficiaries nationwide and  in individual states have private health coverage, we analyzed data from  the only national data source containing this information, the Current  Population Survey (CPS) conducted by the U.S. Census Bureau. CPS is  designed to represent a cross section of the nation’s civilian  noninstitutionalized population. The survey provides estimates for a  variety of demographic characteristics for the nation as a whole and, for  some estimates, furnishes data for individual states and other geographic  areas. Each March, CPS gathers information about health coverage that  survey respondents had at any time in the previous calendar year,  including government health coverage, such as Medicaid, and private  health coverage, such as coverage provided through an employer or union  (employment-based health coverage) and coverage directly purchased by  the beneficiary (individual health coverage). CPS also asks for the  number of months that survey respondents had Medicaid coverage. To  identify individuals who had Medicaid and private health coverage  concurrently in the same year, we focused our analysis on individuals who  reported that they had Medicaid coverage for the entire year along with  private health coverage at some point during the same year. In 2005, about  84,700 households nationwide were included in the survey. Because the  CPS sample size is relatively small in some states in any particular year,  we calculated a 3-year average for each state to help mitigate single-year  anomalies. We used data collected in CPS from 2003 through 2005, which  asked respondents health coverage questions about the 2002 through 2004  time period. To assess the reliability of our use of CPS data, we discussed  our methodology with officials from the U.S. Census Bureau and reviewed  the agency’s data quality-control procedures and related documentation.  We determined that the data were sufficiently reliable for the purposes of  this report. We also interviewed officials from the Centers for Medicare &  Medicaid Services (CMS), the agency within the Department of Health and  Human Services that oversees the Medicaid program, about available data  on Medicaid beneficiaries’ private health coverage. For additional  information on CPS and our methods for and outcomes from analyzing the  data, see appendix I.
To determine what problems affect states’ ability to ensure that Medicaid  is the payer of last resort, in December 2005 we requested information  from states’ Medicaid third-party liability coordinators regarding the three  most significant problems they encountered in ensuring that Medicaid was  the payer of last resort; we received responses from 39 states. These 39  states covered approximately 82 percent of Medicaid beneficiaries and   72 percent of Medicaid payments in fiscal year 2003. We also asked states  to estimate, to the extent possible, any financial losses to the state  resulting from each identified factor or problem. We did not assess the  underlying basis for states’ reported estimates; however, we did compare  the total losses reported by states with Congressional Budget Office  estimates of potential Medicaid savings from the third-party liability  provisions of the Deficit Reduction Act of 2005 and determined that the  states’ estimates were sufficiently reliable for the purposes of this report.  We met with officials from a consulting firm that assists 27 states with  third-party liability issues. We reviewed the Deficit Reduction Act of 2005  (hereafter referred to as the “Deficit Reduction Act” or the “act”), which  was enacted in February 2006 during our review; examined its potential  effect; and discussed the act’s requirements with CMS officials and state  representatives. We conducted our work in accordance with generally  accepted government auditing standards from October 2005 through  September 2006.
subsections: section_title: Background
paragraphs: Established under title XIX of the Social Security Act as a joint federal- state health financing program, Medicaid is one of the largest programs in  the federal and state budgets. States, in administering their Medicaid  programs, must comply with federal requirements. States pay qualified  health providers for a broad range of covered services provided to eligible  beneficiaries. The federal government then reimburses states for a share  of their expenditures. The federal share of each state’s program  expenditures is calculated according to a formula specified in the  Medicaid statute, which allows the federal share to range from 50 to   83 percent.
With Medicaid as payer of last resort, states are responsible for having  plans in place to identify Medicaid beneficiaries’ other sources of health  coverage, determine the extent of the liability of such third parties, avoid  payment of third-party claims, and recover reimbursement from third  parties after Medicaid payment if the state can reasonably expect to  recover more than it spends in seeking reimbursement. Individuals  eligible for Medicaid assign their right to third-party payments to the  state’s Medicaid agency, which allows the state to claim payments for  medical care directly from third parties. In general, state Medicaid  agencies are required whenever possible to avoid paying for services for  which the state agency has reason to believe another party is legally  liable. Whenever states are reimbursed by third parties, they must ensure  that the federal government is given its share of the reimbursement.
Third parties that may be liable for payment of services furnished to  Medicaid beneficiaries can include private insurers and health plans of  employers who self-insure. Private health coverage can be delivered  through managed care plans—plans in which enrollees, or their  employers, pay a monthly payment in exchange for health care services  through affiliated physicians, hospitals, and other providers. In addition,  private insurers and health plans often contract with other entities, such as  plan administrators or pharmacy benefit managers, to administer part or  all of their health care plans. Plan administrators process claims and  manage the day-to-day operations of the associated health plan. Pharmacy  benefit managers negotiate drug prices with pharmacies and drug  manufacturers on behalf of health plans and, in addition to other  administrative, clinical, and cost-containment services, process  prescription drug claims for the health plans. When a Medicaid beneficiary  has pharmacy coverage administered through a pharmacy benefit  manager, the state generally bills the pharmacy benefit manager directly  for reimbursement instead of billing the insurer or the employer.
For states to avoid paying costs for which a third party may be liable, or to  recover from a liable third party payments the state may already have  made, states need to verify when Medicaid beneficiaries have other health  coverage, as well as the services that are covered and the period of  eligibility. States obtain information on other health coverage in two  common ways:    When initially applying for enrollment in a state’s Medicaid program,  applicants are asked to report to the state any other sources of health  coverage they may have. States then verify the applicant’s coverage with  the source of the health coverage, including coverage dates, type, benefits,  and limits. State Medicaid programs often have staff who, on receiving  information suggesting that a Medicaid applicant has other health  coverage, contact the sources of such coverage by phone, mail, or other  means to obtain specific coverage information.
States also often independently identify and verify health coverage of  Medicaid beneficiaries by electronically matching the states’ coverage files  with those of the other coverage sources. This type of verification is  important because information provided by Medicaid applicants may be  incomplete. Applicants may not report other sources of health coverage,  or they may not know if they have such coverage; for example, a custodial  parent may not realize that his or her child has health coverage through  the noncustodial parent’s employment-based health plan. Additionally,  Medicaid beneficiaries who do not have other coverage when they first  enroll in Medicaid may obtain it later. States may have agreements, called  data-matching agreements, through which insurers, health plans, and other  potential third parties periodically provide states with an electronic copy  of their coverage files or with access to company databases. Third parties  that are willing to work with states to electronically share their coverage  files facilitate appropriate billings and reduce the administrative burden,  on states and on third parties, associated with verifying coverage on a  case-by-case basis.
Once verification of any available private health coverage occurs, the state  can redirect health care providers’ claims to a responsible third party (a  process known as cost avoidance), and it can seek reimbursement from  the third party for payments it has already made (a process known as “pay  and chase”). Identifying and verifying coverage early is important,  because it is administratively more costly and time-consuming for states to  seek reimbursement for payments that have already been made. If third  parties do not readily pay claims for which the state Medicaid agency is  seeking payment, it is often not cost-effective for states to spend resources  pursuing payment on a claim-by-claim basis, even though substantial total  dollars could be involved. For example, the states might not have the  resources to further pursue payment through legal action. Conversely,  success in verifying coverage, avoiding Medicaid payments for those  beneficiaries with private health coverage, and collecting on previously  paid claims from third parties can result in substantial Medicaid savings.  Of the $5.5 billion that states reported in third-party-related savings in  fiscal year 2004, states reported more than $4.9 billion in Medicaid  payments avoided and more than $524 million in third-party recoveries.
section_title: An Estimated 13 Percent of Medicaid Beneficiaries Have Private Health Coverage
paragraphs: On the basis of self-reported health coverage information from the Census  Bureau’s annual CPS covering the 2002 through 2004 time period, an  average of 13 percent of respondents who reported having Medicaid  coverage for the entire year also reported having private health coverage  at some time during the same year. Individual state estimates ranged from  9 percent in Alabama, Arizona, and California to 22 percent in Iowa and  South Dakota and 23 percent in Wyoming (see table 1). Most often, the  source of private health coverage was an employer or union. Nationwide,  an estimated 11 percent of Medicaid beneficiaries reported having  employment-based health coverage (ranging from about 7 percent in  Arizona and Alabama to about 17 percent in Colorado, Michigan, New  Hampshire, and Wyoming), whereas about 2 percent reported having  individual health coverage (ranging from about 1 percent in 11 states to  about 8 percent in Iowa).
States also identify and collect information on private health coverage as  part of administering their own Medicaid programs, but this information  cannot be used to assess Medicaid beneficiaries’ private health coverage  on a nationwide basis. State Medicaid agencies capture from their  automated systems information on private health coverage they have  identified for their Medicaid beneficiaries. According to CMS, however,  this information is not reliable for measuring the extent of beneficiaries’  private health coverage nationwide, for comparing among states, or for  comparing states’ identified coverage with that identified by CPS. Certain  states may, for example, capture information only for those beneficiaries  whose coverage has been verified, while other states may capture  coverage even though the state has not yet verified the services that are  covered or the period of eligibility.
section_title: States Face Problems in Verifying Coverage and in Collecting from Third Parties
paragraphs: Problems states face in ensuring that Medicaid is the payer of last resort  fall into two broad categories: problems verifying whether beneficiaries  have private health coverage and problems collecting payments (or  “paying and chasing”) when such coverage exists. Third-party liability  provisions in the Deficit Reduction Act could help address some of these  problems, although two issues require resolution in order to aid states as  they implement the act. In particular, federal guidance is needed to clarify  the time by which states must comply with the relevant provisions and  also to clarify the entities covered by requirements to provide states with  information regarding third-party coverage.
subsections: section_title: Problems Verifying Whether Medicaid Beneficiaries Have Private Health Coverage
paragraphs: Verification of available private health coverage for Medicaid beneficiaries  is key to ensuring that states are able to appropriately avoid paying claims  or to collect from those that are liable. Nevertheless, state officials often  told us, one of the top three problems they faced in ensuring that Medicaid  was the payer of last resort was related to verifying beneficiaries’ other  coverage. Some state officials reported their problem broadly, stating, for  example, that third parties would not cooperate in providing eligibility or  coverage information. Others cited specific problems related to the  verification process, stating, for example, that third parties would not  assist with the state’s verification process by sharing coverage files  electronically. Officials from 27 of the 39 responding states reported one  or more different types of problems with verifying the services that were  covered and the period of eligibility, which we summarized in two  categories (see table 2): (1) verifying coverage information and   (2) accessing electronic coverage files. Although most states’ officials  were not able to estimate the losses to the Medicaid program due to these  verification problems, officials in 10 states did provide an estimate. The  estimated loss for these 10 states totaled $54 million–$60 million (the loss  is stated as a range because some states estimated their losses as a range  rather than as a single dollar estimate).
Problems verifying coverage information. Officials in 23 states  reported problems verifying coverage information; of these, officials in 8  states were able to estimate their annual losses due to third parties’ failure  to provide coverage information, for a total of $47 million–$52 million.  State officials reported a range of problems they experienced in verifying  coverage information. For example, officials in 12 states indicated that  certain third parties or their contractors, such as self-insured plans,  pharmacy benefit managers, or plan administrators, ignored the state’s  requests for verification information about Medicaid beneficiaries or  declined to verify coverage. Four states reported that third parties cited  privacy provisions in the Health Insurance Portability and Accountability  Act of 1996 as one reason they could not share coverage information with  state Medicaid offices. Additionally, an official in 1 state reported that  some third parties would not verify coverage for seasonal workers and  that some insurance companies limited the number of verifications they  were willing to provide during a single phone call.
Problems accessing electronic coverage files. Officials in five states  reported verification problems specifically related to accessing the  electronic coverage files of third parties and their contractors; officials in  two of these states were able to estimate their annual losses due to lack of  access to electronic coverage files, for a total of $7 million–$8 million. The  systematic cross-checking of state and third-party health coverage data,  which access to electronic files makes possible, improves states’ ability to  identify beneficiaries with third-party health coverage. Officials in two  states commented, for example, that data-matching agreements would  enhance their discovery of private health coverage or would greatly  improve their billing capabilities. Officials in five states reported that third  parties would not participate in data-matching agreements or that  electronic coverage files were not made available to the states.
The potential losses to Medicaid because of lack of verification  information, both electronic and other, may be sizable. Officials from the  private consulting firm we contacted estimated that its recoveries from a  major pharmacy benefit manager increased by more than 200 percent after  the pharmacy benefit manager shared coverage information with the  consulting firm. Given such an increase from this one-time sharing of  information, the consulting firm estimated that recoveries from the four  largest pharmacy benefit managers could potentially rise by more than  $300 million a year if such information sharing occurred regularly.
section_title: Problems Collecting Payments from Third Parties and Their Contractors
paragraphs: If a state has not established the existence of third-party coverage at the  time a claim is submitted, it must pay the claim and collect its payment  from the liable party later, after that coverage has been verified. Officials  in 35 of the 39 reporting states listed problems with such “pay-and-chase”  scenarios among their top three problems faced in ensuring that Medicaid  is the last payer. We summarize these problems in five categories: (1) time  limits for filing claims, (2) restrictions imposed by managed care and  health plans, (3) inconsistent claiming requirements imposed by third  parties, (4) lack of response or cooperation from third parties, and   (5) weak or problematic state or federal legislation. Although officials in  most states were unable to estimate their losses due to problems  associated with collecting payments from third parties, officials in 14  states estimated a total annual loss of $184 million–$196 million (see   table 3). (The loss is stated as a range because some states estimated their  losses as a range rather than as a single dollar figure.)
Problems with time limits for filing claims. Officials in 15 states  reported problems related to timely filing of claims; officials in 10 states  were able to estimate their annual losses in this category, for a total of  $76 million–$77 million. State officials reported that some third parties and  their contractors have established specific time limits for filing claims.  That is, a third party or its contractor might process a claim only if it is  filed within a certain time period after services are provided—such as  within 60 or 90 days from the date of service. If a state does not submit its  claim for services provided to a Medicaid beneficiary within the specified  time, some third parties deny payment of the claim. According to state  officials, time limits—such as 60 or 90 days from the date of service—pose  a particular problem because of how long it can take to verify Medicaid  beneficiaries’ private health coverage. An official in 1 state, for example,  estimated that in 1 year (November 2004 through October 2005), third- parties rejected more than $32 million in claims from the state because the  state did not submit the claims within the third-parties’ established time  frames.
Problems with restrictions imposed by managed care and health  plans. Officials in 17 states reported problems imposed by managed care  and health plan restrictions; officials in 10 of these states were able to  estimate their annual losses in this category, for a total of $74 million.  State officials reported a range of issues relating to restrictions the plans  imposed as to when services are covered or to whom reimbursements for  claims can be made. For example, officials in 9 states reported that some  third parties or their contractors would not reimburse the state for  services provided to covered Medicaid beneficiaries if the Medicaid  beneficiaries did not follow requirements established in the third parties’  managed care plans, such as obtaining prior authorization for services.  One state official estimated an annual loss to the state’s Medicaid program  of more than $11 million per year because of managed care plans’  requirements that the Medicaid beneficiaries also covered under the  managed care plan obtain preauthorization for services; if such  authorization was not obtained by the beneficiary, the managed care plans  would not reimburse the state Medicaid program. Another type of  restriction that states reported related to requirements for whom the  health plan would reimburse. For example, officials in 2 states reported  problems with health plans whose coverage provisions did not allow them  to pay state Medicaid programs directly but instead required that  payments be made to the Medicaid beneficiaries themselves. An official in  1 state remarked that it was labor intensive and often impossible to recoup  such payments from beneficiaries.
Problems with inconsistent claims requirements among third  parties and limited state capacity to bill electronically. Officials in  13 states reported problems related to third parties’ or their contractors’  inconsistent requirements for claims or problems related to limits in the  states’ capacity to bill electronically; officials in 3 states were able to  estimate their annual losses in this category, for a total of $13 million.  Some third parties or their contractors, for example, required claims to be  submitted electronically, while others could not accept electronic claims.  Third parties or their contractors also rejected claims because they were  not in a format acceptable to the third party or did not contain specific  pieces of information. For example, an official in 1 state told us that third  parties may require information on their claim forms that Medicaid does  not require or collect, such as a unique provider number, and a state can  have difficulty obtaining such information after the fact. The official in this  state estimated a loss of $600,000 in a single year because of such  problems. Administrative problems like these are compounded because  states submit claims to many different third parties, each with their own  formats and requirements.
Problems with lack of response or cooperation from third parties  or their contractors. Officials in 12 states reported problems related to  third parties’ lack of response to or cooperation with claims filed for  payment; of these, 3 states were able to estimate their annual losses in this  category, for a total of $4 million–$6 million. Some problems arose, for  example, when third parties’ contractors, such as pharmacy benefit  managers, were not specifically authorized by the third parties to process  or pay the claims on the third parties’ behalf when the claims originated  from state Medicaid programs. According to CMS, one problem involves  Medicaid beneficiaries who have pharmacy coverage administered  through a pharmacy benefit manager that has not been specifically  authorized by its contracting health plan or insurer to process Medicaid  claims from the state. If the beneficiary provides a pharmacist with  information on his or her Medicaid coverage, rather than information on  the pharmacy benefit manager, the pharmacist may receive payment from  the state Medicaid program, which must then seek reimbursement for its  payment from the pharmacy benefit manager (“pay and chase”). Often, the  pharmacy benefit manager returns these claims unpaid to the state and  suggests that the state bill the third party directly. This situation creates an  administrative problem for the state, since beneficiaries’ health plan cards  generally identify only the pharmacy benefit manager and not the  contracting insurer or health plan. An official in 1 state also commented  that third parties created inappropriate denial reasons, such as the state’s  failure to submit a copy of a Medicaid beneficiary’s health insurance card  with the state’s claim. Officials in 3 states reported that third parties would  not respond to their claims. An official in another state observed that third  parties can ignore claims submitted to them because no penalty or  requirement exists for third parties to reimburse Medicaid.
Weak or problematic state or federal legislation. Officials in seven  states—responding to our information request before the 2006 enactment  of the Deficit Reduction Act—reported that weak or problematic state or  federal legislation hindered their efforts to ensure that Medicaid was the  payer of last resort; officials in two of these states were able to estimate  their annual losses in this category, for a total of $17 million–$26 million.  Officials suggested the need for stronger state or federal legislation, which  would require third parties to pay Medicaid claims, participate in  electronic data matching of coverage information, or extend the time  frames for states to file claims. One state official, for example, indicated  that stronger legislation, with more comprehensive requirements that third  parties doing business in the state reimburse the state, would be helpful.  Two other state officials indicated that an existing provision in Medicaid  legislation, which requires the states to pay claims under certain  circumstances even when the state is aware of other coverage, was  problematic. Specifically, this requirement—intended to prevent delays in  care for pregnant women and for children—requires states to pay and  chase when claims are for prenatal care and preventive pediatric services  and when services are provided to a minor for whom the state is enforcing  a child-support order against a noncustodial parent. The President’s fiscal  year 2007 budget included a legislative proposal to change this  requirement. Under the proposal, states would be allowed to avoid costs,  rather than pay and chase, for claims for prenatal and preventive pediatric  services when a third party is responsible through a noncustodial parent’s  obligation to provide coverage, if the states ensure protection for  providers and beneficiaries.
Although in most cases—21 of 35 states that reported problems collecting  from third parties or their contractors—state officials we contacted were  unable to estimate the losses to Medicaid due to problems collecting from  third parties, the total losses could be sizable. The private consulting firm  that works with states reported collecting $60 million for states in 2005 by  rebilling third parties for previously unprocessed claims. According to  state officials and CMS, many states do not have the resources to follow  up repeatedly on claims that have been rejected or otherwise unpaid and  so potentially suffer annual losses in the millions of dollars.
section_title: Legislation Enacted in 2006 Includes Provisions Related to Third-Party Liability Problems Raised by States, but Certain Issues Require Resolution
paragraphs: The Deficit Reduction Act addresses some of the problems reported by  state officials. For example, the new law adds to the existing list of entities  that may be considered third parties certain entities that were previously  not specifically listed, including “self-insured plans”; “managed care  organizations”; “pharmacy benefit managers”; and “other parties that are,  by statute, contract, or agreement, legally responsible for payment of a  claim for a health care item or service.” In addition, the law requires states  to have in effect laws requiring certain specified entities, as a condition of  doing business in their state, to    provide the state, upon request, with coverage and other data, including  information on the nature of coverage and the periods of time during  which individuals or their spouses or dependents were covered;   accept the states’ right of recovery for services and assignment of a  Medicaid enrollee’s right to payment by those entities or organizations; respond to inquiries by the state regarding a claim for payment submitted  within 3 years after the date a service was provided; and    agree not to deny a claim submitted by the state solely on the basis of the  date of submission of the claim, the type or format of the claim form, or  failure to provide proper documentation at the time of service, as long as  the claim is submitted by the state within 3 years of the service date and  the state enforces its rights with respect to the claim within 6 years of  submitting it.
Officials from some states and the private consulting firm that works with  states told us that the act’s requirements may help alleviate states’  reported problems with verifying coverage information, time limits for  filing claims, and certain third parties’ lack of response or cooperation  with claims submitted for payment—three of the problems most often  reported by states responding to our questions. Losses due to these  problems can be substantial: in response to our information request, 30  states estimated such losses at collectively more than $120 million  annually. The private consulting firm reported that, after discussing with  pharmacy benefit managers the new Deficit Reduction Act provision  related to time limits for filing claims, the firm agreed to loosen its own  time frames for filing, resulting in an estimated $2 million dollars in  savings for outstanding claims.
Because the Deficit Reduction Act requires states to have legislation in  effect to implement the new provisions, it is too soon to assess the extent  to which the act will address the problems that states reported to us.  Further, we identified two issues that require resolution in order to aid  states in complying with the act’s requirements:    First, the time frame by which states must have their laws in effect is  uncertain because of an apparent inconsistency within the Deficit  Reduction Act concerning the effective date of that provision. Specifically,  the section of the law that determines the date by which states must have  these laws in effect references a section of the law that does not exist. In  June 2006, CMS officials said they had not determined how to interpret the  apparently inconsistent language and whether legislation would be  necessary to resolve it. Until this determination is made, states may be  uncertain as to the date by which they must comply with this requirement  of the Deficit Reduction Act. Some state legislatures, for example, may act  upon new Medicaid requirements such as this one only upon notification  of a specific implementation date.
Second, there is also some disagreement in the industry as to whether the  statutory provisions regarding the requirement to provide states with  coverage and other information apply to certain entities. According to  CMS and officials from the private consulting firm, some entities, such as  certain pharmacy benefit managers and plan administrators, have  indicated that the requirement that states have laws in effect to require  reporting of coverage and related information does not apply to them. For  example, private insurers and health plans may hire pharmacy benefit  managers and plan administrators to process the claims—that is, to pay  the claims on their behalf—and the pharmacy benefit managers and plan  administrators may not view themselves as “legally responsible for  payment of a claim for a health care item or service.” Without cooperation  from these contracted entities in sharing coverage information and in  paying claims, states may continue to have many of the problems they  reported. CMS officials said that they had met with trade associations  representing pharmacy benefit managers and plan administrators to  discuss and obtain input about these entities’ responsibilities under the  Deficit Reduction Act.
With regard to both provisions, in June 2006, CMS officials said that they  were determining how best to help states implement the new  requirements. The agency was reviewing how to interpret the law to  address both the effective date for the requirement to have state  legislation in effect and which entities are covered by requirements to  provide states with information on coverage and other matters. The  effectiveness of the Deficit Reduction Act’s third-party liability provisions  in addressing the problems that states identified may depend on the  guidance CMS issues and in what manner states carry out the new law’s  provisions.
section_title: Conclusions
paragraphs: In an era of fiscal pressure on both federal and state budgets, it is  important to ensure that Medicaid is administered as efficiently and  effectively as possible. States have a key role in Medicaid’s successful  administration, including efforts to ensure, as Congress intended, that  Medicaid does not pay for services when other sources of health care  coverage are available. With an estimated 13 percent of Medicaid  beneficiaries having private health coverage available to them, significant  savings can accrue to both the federal government and the states when  states are able to avoid costs and recover payments from liable third  parties. We found, however, that states often encounter problems in  identifying beneficiaries’ private health coverage and in collecting  payments from liable third parties. The Deficit Reduction Act includes  provisions related to some of the states’ concerns, and CMS could  facilitate states’ efforts to implement the act’s requirements by providing  guidance to states as to the time frame under which states must have their  laws in effect and the types of entities to which the law applies.
section_title: Recommendations for Executive Action
paragraphs: To resolve issues that are critical to the implementation of the Deficit  Reduction Act’s third-party provisions and to assist states in their efforts  to ensure that Medicaid is the payer of last resort, we recommend that the  Administrator of CMS take the following two actions:    Determine and provide guidance to states with regard to the time frames  by which states must have in effect laws that implement relevant third- party requirements of the Deficit Reduction Act.
Determine and provide guidance to states with regard to the entities  covered by the Deficit Reduction Act’s requirements to provide states with  coverage and other information.
section_title: Agency Comments
paragraphs: We provided a draft of this report to CMS for comment and received a  written response from the agency (reproduced in app. II). The agency  acknowledged that our report identified many of the challenges state  Medicaid agencies face in attempting to ensure that Medicaid is the payer  of last resort. CMS concurred with both recommendations and said that  the agency planned to issue a decision with respect to the effective  implementation date of, and the entities covered under, the Deficit  Reduction Act. CMS also provided technical comments, including a  comment that the report should clarify discussions regarding the provision  of both coverage and eligibility data. We clarified our text to indicate that  in this report we refer collectively to the process of determining the  eligibility period and the services that are covered as “verifying health  coverage.” We made a corresponding clarification to our recommendation.  Other technical comments were incorporated as appropriate.
As arranged with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days after its  issue date. At that time, we will send copies of this report to the Secretary  of Health and Human Services, the Administrator of the Centers for  Medicare & Medicaid Services, and other interested parties. We will also  make copies available to others upon request. In addition, the report will  be available at no charge on the GAO Web site at http://www.gao.gov.
If you or your staff members have any questions, 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. Major contributors to this report are acknowledged in  appendix III.
section_title: Appendix I: GAO’s Analysis of the Current Population Survey Conducted by the U.S. Census Bureau
paragraphs: ppendix I: GAO’s Analysis of the Current  urvey Conducted by the U.S.
To assess the extent to which Medicaid beneficiaries have private health  coverage, we analyzed the Annual Social and Economic Supplement of the  Current Population Survey (CPS), conducted by the U.S. Census Bureau  for the Bureau of Labor Statistics. This appendix describes CPS, our  analysis of CPS, and our results.
subsections: section_title: Description of the Current Population Survey
paragraphs: CPS is designed to represent a cross section of the nation’s civilian  noninstitutionalized population. The sample provides estimates for the  nation as a whole and serves as part of model-based estimates for  individual states and other geographic areas. The supplement is designed  to estimate family characteristics, including health coverage, during the  previous year. In 2005, about 84,700 households were included in the  sample for the Annual Social and Economic Supplement, with a total  response rate of about 83 percent. In 2004 about 84,500 households were  included with a total response rate of 84 percent. The totals for 2003 were  approximately 81,000 and 85 percent, respectively.
Each March, CPS gathers information about health coverage that  respondents had at any time during the previous calendar year, including  government health coverage such as Medicaid and private health coverage  such as coverage provided through an employer or union (employment- based health coverage) and coverage directly purchased by the beneficiary  (individual health coverage). CPS also asks for the number of months that  beneficiaries had Medicaid coverage during that same year. Research has  shown that health coverage is underreported in CPS for a variety of  reasons; for example, many people may be unaware that a health  insurance program covers them or their children if they have not recently  used covered services. In addition, CPS underreports Medicaid coverage  compared with enrollment and participation data from the Centers for  Medicare & Medicaid Services.
section_title: Description and Results of GAO’s Analysis
paragraphs: We analyzed data from the Annual Social and Economic Supplement to  CPS from 2003 through 2005, which asked about health coverage during  the prior year (2002 through 2004). To prepare official statistics from CPS  on type of health insurance coverage, CPS identifies Medicaid  beneficiaries by analyzing responses from multiple questions about  whether the respondent had Medicaid at any time during the prior year.  One of these questions has a related field allowing respondents to report  the number of months that Medicaid coverage was provided. To identify  individuals who had Medicaid and private health coverage concurrently in  the same year, we focused our analysis on individuals who responded  positively to the one Medicaid question and also reported having Medicaid  coverage in all 12 months of the year. Specifically, we selected individuals  who reported that they were covered by Medicaid for the entire prior year  and determined the percentage of these Medicaid beneficiaries who  reported that they also had employment-based health coverage or  individual health coverage at some point in the prior year.
To assess the reliability of the CPS data, we discussed with officials from  the Census Bureau’s Poverty and Health Statistics Branch the use of this  definition of Medicaid beneficiaries, and we reviewed the Census Bureau’s  data quality-control procedures and related documentation. We  determined that the data were sufficiently reliable for the purposes of this  report. For additional information on Census efforts to ensure the  reliability of CPS data—including adjustment for nonresponse, controls on  nonsampling error, computing composite weights, estimation of variance,  and derivation of independent population controls—see U.S. Department  of Labor, Bureau of Labor Statistics; and U.S. Department of Commerce,  U.S. Census Bureau, Current Population Survey: Design and  Methodology, Technical Paper 63RV (Washington, D.C.: March 2002),  http://www.bls.census.gov/cps/tp/tp63.htm (downloaded April 13, 2006).  Updated survey information is available on the Web at  http://www.bls.census.gov/cps.
Because CPS is a probability-based sample, estimates derived from it are  subject to sampling error: slightly different estimates can result from  different samples. We expressed our confidence in the precision of the  particular samples’ results as 95 percent confidence intervals (i.e., plus or  minus 4 percentage points). This confidence interval is the interval that  would contain the actual population value for 95 percent of the samples  that could have been drawn. We used CPS’s general variance methodology  in the technical documentation to estimate this sampling error for our   3-year average, reported as confidence intervals. All CPS percentage  estimates contained in this report have 95 percent confidence intervals  within plus or minus 7 percentage points of the estimate itself.
section_title: Appendix II: Comments from the Centers for Medicare & Medicaid Services
section_title: Appendix III: Contact and Staff Acknowledgments
subsections: section_title: Acknowledgments
paragraphs: In addition to the contact mentioned above, Katherine M. Iritani, Assistant  Director; Ellen W. Chu; Kevin Dietz; Kevin Milne; Jill M. Peterson; and  Terry Saiki made key contributions to this report.