Medicaid Demonstration Waivers: Approval Process Raises Cost Concerns and Lacks Transparency
Published: 2013-06-25T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Medicaid, a $436 billion federal and state health care program for low-income individuals and families, is a significant and growing expenditure. Section 1115 of the Social Security Act authorizes the Secretary of Health and Human Services to waive certain Medicaid requirements and allow otherwise uncovered costs for demonstration projects that are likely to promote Medicaid objectives. By HHS policy, these demonstrations should be budget neutral, that is, not increase federal spending over what it would have been if the state's existing program had continued. States estimate what their spending would have been without the demonstration, and HHS approves a spending based on projected spending.
GAO was asked to review HHS approval of recent Medicaid section 1115 demonstrations. GAO examined (1) the purpose of new demonstrations, and (2) the extent to which HHS's policy and process for reviewing proposed demonstration spending provide assurances that federal costs will not increase. For 10 new comprehensive demonstrations approved from January 2007 through May 2012, GAO reviewed application, approval, and budget neutrality documents provided by HHS; calculated estimated spending limits; and interviewed HHS officials.
section_title: What GAO Found
paragraphs: The 10 new demonstrations GAO examined expanded states' use of federal funds and implemented new coverage strategies. Arizona and Texas established funding pools to make new supplemental payments beyond what they could have made under traditional Medicaid requirements and receive federal matching funds for the payments. All 10 demonstrations were approved to use different coverage strategies or impose new cost sharing requirements, including limiting benefits or imposing deductibles for certain populations.
The Department of Health and Human Services' (HHS) budget neutrality policy and process did not provide assurances that all recently approved demonstrations will be budget neutral. For 4 of 10 demonstrations GAO reviewed, HHS approved spending limits that were based on assumptions of cost growth that were higher than its benchmark rates, and that, in some cases, included costs states never incurred in their base year spending. HHS's benchmark growth rates are the lower of the state's recent growth rates or projections for Medicaid program growth nationwide. For example, HHS approved a spending limit for Arizona's demonstration using outdated information on spending--1982 data that was projected forward--that reflected significantly higher spending than what the state's Medicaid program had actually cost. For Texas, HHS approved a spending limit using a base year that included billions in costs the state had not incurred. GAO found limited support and documentation for the higher-than-benchmark limits HHS approved. If HHS had held the 4 demonstrations' spending to levels suggested by its policy, the 5-year spending limits would have been an estimated $32 billion lower than what was approved; the estimated federal share of this reduction would be about $21 billion.
For 6 other demonstrations, the approved spending limits reflected the states' actual historical costs or criteria that were specified in law, which HHS followed. In examining HHS's current written budget neutrality policy, GAO found that the policy is outdated and does not include a process for assuring the reliability of the data used to set spending limits. GAO has previously suggested that Congress require HHS to improve its budget neutrality process, in part, by improving the review criteria and methods, and by documenting and making clear the basis for approved limits. In addition to these suggestions, GAO believes HHS needs to take further actions to address the findings in this report.
section_title: What GAO Recommends
paragraphs: GAO recommends that HHS update its budget neutrality policy and reexamine spending limits for the Arizona and Texas demonstrations. HHS disagreed with GAO's recommendations. GAO believes these steps are needed to improve the budget neutrality process.

section_title: Letter
paragraphs: The Medicaid program—a $436 billion joint federal-state program that  finances health care coverage for low-income populations, including  children and aged or disabled adults—involves significant and growing  expenditures for the federal government and states. Under section 1115  of the Social Security Act, the Secretary of Health and Human Services  may waive certain federal Medicaid requirements and allow costs that  would not otherwise be covered for experimental, pilot, or demonstration  projects that are likely to promote Medicaid objectives. These  demonstrations also allow states to test and evaluate new approaches for  delivering Medicaid services.funds, or about one-fifth of the $260 billion in federal Medicaid  expenditures, were for services, coverage initiatives, and delivery system  redesigns provided under section 1115 demonstrations in 40 states. For  10 of these states, more than half of their total federal Medicaid  expenditures were for section 1115 demonstrations.
In fiscal year 2011, $57.5 billion in federal  Under Department of Health and Human Services (HHS) policy, section  1115 demonstrations should not be approved unless they are budget  neutral to the federal government; that is, the federal government will  spend no more under a state’s demonstration than it would have spent  without the demonstration. Budget neutrality generally is not a statutory  requirement; however, HHS’s policy requires states to show that their  demonstrations will be budget neutral as part of their application to HHS.  Once approved, each demonstration operates under a negotiated budget  neutrality agreement that places a limit on federal Medicaid spending over  the life of the demonstration. In assessing a state’s projected spending  limit, HHS’s policy calls for using estimates of growth that are the lower  of: (1) the state’s historical growth for Medicaid in recent years, or   (2) the President’s budget Medicaid trend rate projected for the nation.  The lower rate is referred to as the benchmark growth rate.
We have had long-standing concerns with HHS’s policy, process, and  criteria for reviewing and approving section 1115 demonstrations,  including the absence of a federal process for obtaining public input and a  lack of transparency in the basis for approved spending limits. For example, we previously found that although some demonstrations had the  potential to significantly affect beneficiaries, advocates and others had not  had an opportunity to review and provide input prior to the  demonstrations’ approval. In recent years, Congress and HHS, however,  have taken significant steps to improve the review and approval process,  by establishing a public input process at the federal level before  demonstrations are approved. We have also reported that HHS had  approved spending limits that included impermissible costs in the  baselines, that included hypothetical costs in the baselines, or that  exceeded benchmark growth rates. As a result of these findings, we  made recommendations to HHS in 2002 and 2004 to take certain steps to  improve the budget neutrality process, such as (1) clarifying the criteria  for reviewing and approving states’ demonstration spending limits,   (2) better ensuring that valid methods are used to demonstrate budget  neutrality, and (3) documenting material explaining the basis for any  approvals and making the material public. In a 2008 report, because  HHS disagreed with these recommendations, we suggested that  Congress consider requiring that HHS take these actions to improve the  section 1115 demonstration review process.have not yet been addressed.
These issues, however,  You expressed interest in the section 1115 demonstrations approved by  HHS since we last reviewed selected demonstrations, which were  approved from July 2004 through December 2006. For this report, we reviewed a selection of new comprehensive section 1115 demonstration  proposals approved since 2007 for (1) the purpose of the demonstrations,  and (2) the extent to which HHS’s policy and process for reviewing  proposed spending under the demonstrations provides assurances that  federal costs will not increase.
To describe the purpose of new comprehensive demonstrations HHS has  approved since 2007, we reviewed all those approved from January 2007  through May 2012 and that were still operating in May 2012. We excluded  demonstrations that were extensions and amendments of previously  approved demonstrations and those that were not comprehensive, that is,  they were limited to one category of services. We also excluded  demonstrations that extended coverage to new populations in response  to Medicaid expansion, which can begin in 2014 under the Patient  Protection and Affordable Care Act (PPACA). We identified  demonstrations submitted by 10 states that met these criteria: Arizona,  the District of Columbia, Idaho, Indiana, Michigan, Missouri, New Mexico,  Rhode Island, Texas, and Wisconsin. We reviewed application and  approval documents for each demonstration, and interviewed HHS  officials. We used certain characteristics to describe the purpose of the  demonstrations, such as whether the demonstrations changed how the  states used federal funds, expanded Medicaid coverage to a new  population of beneficiaries, and implemented new cost sharing  requirements.
To assess the extent to which HHS’s policy and process provides  assurances that federal costs will not increase over what they would have  been in the absence of the demonstration, we reviewed HHS’s policy. We  also reviewed the documentation for the 10 new comprehensive  demonstrations selected for the first objective and budget neutrality  analyses prepared by the states and submitted to HHS. We examined the  basis of HHS’s approved federal and state combined spending limit for  each demonstration, and determined whether HHS followed its policy for  determining budget neutrality. We then compared the spending limits  approved by HHS with our estimates of the spending limits. We  calculated our estimate of the spending limits in accordance with HHS’s  policy by using the most recent year of expenditures provided by the state  for the base year, and the lower of either the state’s historical average  cost growth rate or the estimate of the Medicaid national growth rate  developed by the Centers for Medicare & Medicaid Services (CMS)  actuary. We then estimated the federal share of the spending limits using  the 2012 Federal Medical Assistance Percentage (FMAP) for each  state. In our assessment, we did not trace the underlying spending and  enrollment data used to develop spending limits to source documentation  on spending or determine whether the baseline expenditures included  impermissible costs. To the extent baseline spending or enrollment were  overstated or understated, our estimates of benchmark spending limits  could also be overstated or understated. We determined that the data  were sufficiently reliable for the purpose of examining the information that  HHS used in making its decisions about budget neutrality. To supplement  our reviews, we interviewed HHS and Office of Management and Budget  (OMB) officials about HHS’s policy and process for setting spending limits  for demonstrations, the basis of the spending limits for the 10  demonstrations, and the steps taken to ensure the quality of the data  used to set spending limits. We did not obtain documentation from state  officials or discuss demonstration proposals, approvals, and cost data  with state officials.
We conducted this performance audit from June 2012 to June 2013 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: Each state administers its Medicaid program in accordance with its own  Medicaid plan, which determines the groups of individuals to be covered,  services to be provided, methodologies for providers to be reimbursed,  and the administrative requirements that states must meet. To receive  federal matching dollars for services provided to Medicaid beneficiaries,  each state must submit a Medicaid plan for review and approval by HHS.  States must meet certain federal requirements, but have flexibility beyond  these federal parameters. For example, states must cover certain  “mandatory” populations and benefits, but they have the option of  covering “optional” categories of individuals and benefits. Coverage of  optional populations and benefits varies across the states. States may  also choose from different delivery systems, such as fee-for-service or  managed care.
States pay health care providers for covered services provided to  Medicaid beneficiaries based on provider claims for services rendered.  States generally make two types of supplemental payments to certain  providers—payments separate from and in addition to those made to  providers using regular Medicaid payment rates. Under federal law, states  are required to make Disproportionate Share Hospital (DSH) payments to  hospitals that serve a disproportionate share of low-income and Medicaid  patients, in addition to regular Medicaid payments. Hospitals are subject  to an annual limit on DSH payments, defined as the hospitals’  uncompensated care costs for Medicaid and uninsured patients minus  Medicaid payments, and payments made on behalf of uninsured  patients. States also make other supplemental payments, which are  often referred to as non-DSH supplemental payments or “Upper Payment  Limit (UPL) payments” to providers such as hospitals and nursing homes.  These payments are based on the difference between Medicaid  payments for services using regular Medicaid payment rates and the  UPL, which is the ceiling on federal reimbursement. In general, the use  of managed care to deliver Medicaid services precludes states from  making UPL payments to providers because states are prohibited from  making such payments for services provided under a managed care  contract.
subsections: section_title: Medicaid Section 1115 Demonstrations
paragraphs: Generally, the authority provided to the Secretary of Health and Human  Services by section 1115 of the Social Security Act allows states to  expand Medicaid coverage through demonstration projects to “expansion”  populations that would not otherwise be eligible under traditional Medicaid  programs. These demonstrations provide a way for states to innovate  outside of many of Medicaid’s otherwise applicable requirements. For  example, states may test ways to obtain savings or efficiencies in how  they deliver services in order to cover expansion populations. Under a  demonstration, states may also alter their Medicaid benefit package for  categories of covered populations. Without this authority, states generally  would be required to provide covered benefits in the same amount,  duration, and scope to all beneficiaries covered under the state plan.
States may have more than one comprehensive demonstration. For  example, New Jersey had one demonstration targeted at expanding  coverage to uninsured childless adults, and a separate demonstration  targeted at expanding coverage to uninsured parents of Medicaid-eligible  children. Both these demonstrations are comprehensive because they  provide a broad range of services to these populations. States may also  administer a large portion of their Medicaid program under a  demonstration. For example, in Vermont, nearly all of the state’s Medicaid  expenditures in fiscal year 2011 were for costs associated with a  demonstration.
Generally, to extend Medicaid to any previously uncovered populations or  receive federal Medicaid matching funds for otherwise unallowable costs  under the terms of a section 1115 demonstration, states must establish  that the demonstration is budget neutral. To do so, states must show that  their plans for changing their Medicaid program will generate savings to  Medicaid, or they must get approval for redirecting existing Medicaid  funding to cover the expected costs of the demonstration. For example:
States have expanded the population eligible for Medicaid coverage  by implementing managed care. In these demonstrations, states  established budget neutrality by showing they would achieve savings  from enrollment in managed care that could be used to cover new  populations under the demonstration.
States also have been approved by HHS to redirect certain categories  of federal Medicaid funding for new purposes under the  demonstration. Specifically, states have received approval to use all  or a portion of their DSH allotments to cover previously ineligible  individuals and costs under their demonstrations.
States also have expanded coverage to previously ineligible  populations, but in order to maintain budget neutrality, have provided  the expansion population with a reduced benefit package—such as  not covering inpatient hospital care—as compared to the typical  benefits provided to Medicaid beneficiaries. Other strategies have  included imposing higher cost-sharing on services or capping  enrollment for expansion populations.
section_title: Review Responsibilities for Demonstrations
paragraphs: States submit applications for section 1115 demonstrations to HHS. If  HHS approves the demonstration, it is typically approved for a 5-year  period. States that want to renew an existing demonstration have the  option of requesting an extension or submitting an application for a new  demonstration. States that submit an application for a new demonstration  instead of an extension would need to terminate the existing  demonstration, and would be required to notify beneficiaries of potential  changes in coverage. A federal review team examines applications for  both new demonstrations and extensions. The review team is led by CMS  and includes representatives from OMB; from other agencies within HHS  as applicable, such as the Substance Abuse and Mental Health Services  Administration providing a review of waivers that affect mental health; and  HHS Secretarial offices including the Assistant Secretary for Planning and  Evaluation and the Assistant Secretary for Financial Resources. CMS’s  Office of the Actuary provides nationwide data on projected Medicaid cost  growth, but is not part of the federal review team. The federal review may  consist of negotiations, including the exchange of questions and answers  between the review team and the state. In approving applications, HHS  might not approve all components of the states’ request contained in their  applications. (See app. I for a discussion of applications that were  submitted and reviewed between January 2007 and May 2012.)
section_title: Determining Budget Neutrality for Demonstrations
paragraphs: According to HHS’s policy, spending limits are based on the projected  cost of continuing states’ existing Medicaid programs without a  demonstration. The higher the projected costs, the more federal funding  states are eligible to receive. The spending limits can be either an annual  per person limit or an aggregate spending limit that remains fixed for the  entire length of the demonstration, or a combination of both. HHS policy  states that demonstration spending limits will be calculated from two  components:
Spending base. States select a recently completed year that  establishes base levels of expenditures for populations included in the  proposed demonstration—a state’s “spending base.” States also  identify beneficiary groups for inclusion in the proposed  demonstration. For example, demonstrations may include beneficiary  groups, such as aged, blind and disabled, or families with children.  However, the spending base must exclude certain base year  expenditures, such as impermissible provider payments.
Growth rates. States should submit to HHS 5 years of historical data  for per person costs and beneficiary enrollment in their existing  Medicaid program. HHS’s policy states that spending limits should be  based on a benchmark growth rate, which is the lower of state- specific historical growth or the estimates of nationwide growth for the  beneficiary groups included in the demonstration.
The policy  indicates that states, in providing HHS with state-specific historical  growth rates, must also provide quantified explanations of any  unusual changes in the trends. Nationwide projections of cost growth  are developed by CMS actuaries to assist OMB in preparing the  President’s budget. Growth rates for determining budget neutrality can  vary for different eligibility groups. For example, the nationwide  estimates of per capita cost growth in Medicaid for fiscal year 2012  were 6.0 percent for children, 3.4 percent for aged individuals,   2.6 percent for blind and disabled individuals, and 2.5 percent for  adults.
Figure 1 illustrates steps used to set spending limits for proposed section  1115 demonstrations.
Some types of section 1115 demonstrations are not required to follow this  process for determining spending limits. Specifically, for demonstrations  that redirect a state’s federal DSH funding, HHS policy is to base the  spending limit on the lower of the state’s DSH allotment or actual DSH  expenditures prior to the demonstration. In addition, there is another  group of recent section 1115 demonstrations pursuant to which federal  law has defined how to calculate budget neutrality. Specifically, under the  Children’s Health Insurance Program Reauthorization Act of 2009  (CHIPRA), states with existing section 1115 demonstrations covering  childless adults using State Children’s Health Insurance Program (CHIP)  funding were required to end these projects.apply and receive approval for new section 1115 demonstrations through  which they could continue to cover childless adults using Medicaid funds.  CHIPRA required that these new demonstrations be budget neutral, and  required HHS to use a defined process of identifying the spending base  and growth rates for demonstration spending limits.
section_title: New Demonstrations Allowed States to Change How They Used Federal Funds, and to Implement New Coverage Strategies
paragraphs: The 10 new comprehensive section 1115 demonstrations we examined  focused on implementing ways of using federal funds to pay for services  not typically covered under Medicaid. All 10 demonstrations were  approved to implement different coverage strategies or cost sharing for  certain beneficiary populations. Appendix II provides a brief summary of  the key features of 10 demonstrations.
subsections: section_title: HHS’s Approvals Allowed Two States to Establish Funding Pools to Make New Types of Supplemental Payments
paragraphs: Two states we reviewed—Arizona and Texas—obtained the authority  under their section 1115 demonstrations to establish funding pools for  purposes of making supplemental payments and to receive federal  matching funds for these payments.
As approved, Arizona’s section 1115 demonstration allows the state to  make new types of supplemental payments to providers, and allowed the  state to establish a funding pool from which these payments could be  made. Arizona has operated a comprehensive section 1115  demonstration for many years, under which the majority of the Medicaid  population is enrolled in managed care. Under its previous demonstration,  the state made DSH payments to hospitals, but did not make UPL  payments to its providers because the majority of services were provided  under managed care contracts. UPL payments for services provided  under managed care are generally prohibited under federal regulations. In  March 2011, the state requested to terminate its existing section 1115 demonstration in order to limit coverage of certain adult populations.Subsequently, the state received approval for a new demonstration that  continued the existing managed care delivery system, granted the  authority for the state to make new types of supplemental payments to  providers through a Safety Net Care Pool (SNCP), and expanded  coverage to certain populations.
Under the demonstration, the state obtained the authority to claim federal  matching funds for new types of supplemental payments made to  providers from SNCP. The state did not commit any state funds for these  supplemental payments and instead relied on the contributions of eligible  government entities for the nonfederal share of payments. According to  HHS officials, because these supplemental payments were created under  the authority of the demonstration, they were not subject to certain federal  requirements that would otherwise apply. For example, officials reported  that they did not consider these to be DSH payments and therefore the  federal reimbursement for SNCP payments exceeds the maximum  amount Arizona is allowed to receive under its DSH allotment. They  were not considered to be UPL payments and therefore could be made  even when services were provided under a managed care contract.  According to HHS officials, the terms and conditions of the demonstration  defined requirements for these payments. For example, under the terms  and conditions, as the SNCP payments were Medicaid payments, HHS  required they be subject to certain requirements when made to DSH  hospitals. Specifically, SNCP payments received for inpatient or  outpatient hospital costs were required to be counted against each  hospital’s annual DSH payment limit.
The terms and conditions of Arizona’s demonstration also included other  federal requirements and limits for the SNCP payments. Specifically:
For each year of the demonstration, the state was allowed to make up  to $332 million—total federal and nonfederal funds—in payments to  hospitals, clinics, and other nonhospital providers that have high  levels of uncompensated care for medical services provided to  Medicaid eligible and uninsured individuals. Demonstration  requirements also limited these SNCP payments for individual  providers’ to their costs of delivering services to Medicaid and  uninsured individuals, and prohibited SNCP payments for  nonemergency services provided to noncitizens who were not eligible  for Medicaid.
In addition to the $332 million, the state was allowed, for the first   2 years of the demonstration, to make up to $20 million—total federal  and nonfederal funds—in payments that were previously made under  a state-funded health program. Specifically, the state was approved to  make payments to hospital trauma centers, hospital emergency  departments, and rural hospitals across the state for clinical,  professional, and operational costs. These payments were intended to  help hospitals manage their uncompensated care costs. Prior to the  demonstration, these were entirely state-funded payments that  Arizona voters approved in 2002.
Other features of Arizona’s demonstration included expanding coverage  to two groups of children: children with family income at or below   175 percent of the federal poverty level (FPL), who were not otherwise  eligible for Medicaid; and children up to age 19 with incomes between  100 and 200 percent of the FPL, who had access to employer sponsored  health care coverage, and were not otherwise eligible for Medicaid. Total  funding—federal and nonfederal funds—available for expansion was  capped at about $77 million each year by the demonstration. The state  was also allowed to extend the length of Medicaid coverage for  postpartum women from the typical 60 days to 24 months. The total cost  allowed for this program—federal and nonfederal—was $20 million.
Two of the purposes of the Texas section 1115 demonstration were to  allow the state to expand its use of managed care statewide, and to  authorize new supplemental payments through two new funding pools.  Prior to the demonstration, the state provided services to most of the  state’s Medicaid population on a fee-for-service basis. Under this system,  hospitals provided services to Medicaid-covered individuals and then  submitted bills to the state for reimbursement based on the state’s regular  Medicaid payment rates. In addition, the state made DSH payments and  UPL payments for hospital services provided on a fee-for-service basis.
Under the demonstration, HHS approved two new types of supplemental  payments to be distributed through two funding pools. In creating these  pools, the state did not commit any state funds and instead relied on the  contributions of eligible government entities for the nonfederal share of  payments. Under one pool, called the Uncompensated Care (UC) pool,  the state could obtain federal matching funds on provider payments  totaling up to $17.6 billion over the 5-year term of the demonstration.  Under the second pool, called the Delivery System Reform Incentive  Payment (DSRIP) pool, the state could obtain federal matching funds on  provider payments totaling up to $11.4 billion over the 5-year term of the  demonstration. The demonstration significantly increased the amount of  federal funding Texas could claim for the two new types of supplemental  payments. For example, in fiscal year 2011—the year prior to the  demonstration—the state claimed federal matching funds on about   $2.6 billion in UPL payments. Under the demonstration, the state was  authorized to receive federal matching funds on $4.2 billion in payments  made in the first year of the demonstration and on $6.2 billion in  payments made in each of the remaining 4 years of the demonstration.
HHS officials told us that because the UC pool payments were created  under the demonstration, they were not DSH or UPL payments and  therefore were not subject to the federal requirements that govern those  payments. Thus, as with Arizona, these payments were in addition to, and  not limited by, the maximum cap on federal matching that was provided to  the state under its DSH allotment. Officials told us the UC pool payments also were not considered to be UPL payments and could be  made for services provided to individuals enrolled in managed care.  According to HHS, the terms and conditions of the demonstration  established requirements and limits for the UC pool payments. Among  other things, the terms and conditions required that these payments be  limited to individual providers’ uncompensated costs of delivering services  to Medicaid beneficiaries and uninsured individuals.Arizona, because the UC pool payments were Medicaid payments, the  payments for inpatient or outpatient hospital costs were required to be  counted against the amount of DSH payments that an individual hospital  could receive. The terms and conditions also allowed the state to make  these Medicaid supplemental payments to a variety of providers for  serving Medicaid and uninsured individuals. These providers included  physician-practice groups, government ambulance providers, government  dental providers, and rural health providers with no public hospitals.
According to the terms and conditions, the state could not receive federal funding for  expenditures from the DSRIP pool until key milestones are met including: HHS’s approval  of the state’s plan for and status of forming regional health care partnerships; identification  of the public hospitals directing each of these partnerships; and development of a list of  projects related to the four main areas noted above. In addition, incentive payments from  the pool would be based on successful completion of HHS-approved metrics submitted by  the regional healthcare partnerships related to the four areas. counted against the amount of DSH payments a hospital could receive  under its hospital specific DSH limit.
The DSRIP payments were approved by HHS under the expectation that  the state would be expanding its Medicaid coverage under PPACA;  however, since the demonstration’s approval, the state has not confirmed  that it intends to expand Medicaid to new populations allowed under  PPACA. At the time Texas’s demonstration was approved, PPACA  required all states to expand Medicaid coverage to a new mandatory  category of low-income individuals, and states were eligible to receive  enhanced federal funding for this population beginning in January of  2014. However, subsequent to this approval, the U.S. Supreme Court  ruled that any state that chooses not to expand Medicaid coverage will  not be subject to a penalty of losing Medicaid funding for the entire  program, and instead will only forego the enhanced funding for that  population, therefore making the expansion a choice for the states. In  June 2013, a state law was enacted that would prohibit the state Medicaid  agency from expanding Medicaid coverage. In general, HHS can  withdraw authorities to claim federal funding for expenditures under  demonstrations in certain circumstances, including if it determines that  the approval no longer promotes the objectives of the Medicaid program.  However, HHS officials stated that the delivery system improvements that  will result from the DSRIP pool payments will benefit low-income and  Medicaid populations, whether the state expands Medicaid or not. HHS  does not plan to revisit the terms and conditions of the Texas  demonstration as it relates to the DSRIP pool, even if the state does not  expand Medicaid as provided under PPACA.
section_title: HHS Approvals Allowed Four States to Redirect DSH Funds Primarily to Expand Coverage to New Populations
paragraphs: Indiana, the District of Columbia, Wisconsin, and Missouri were allowed  to redirect all or a portion of their federal DSH allotment, primarily to cover  populations made eligible for Medicaid under the terms of the  demonstration. Three of the states—Indiana, the District of Columbia, and  Wisconsin—were approved to use at least some of their DSH allotment  solely for coverage expansion.
Indiana was allowed to use a portion of its DSH allotment to pay for  services for a new population of about 36,000 higher-income parents  and childless adults.
The District of Columbia demonstration expanded full Medicaid  coverage to childless adults with incomes higher than the income  level that would qualify them for Medicaid coverage under PPACA  beginning in 2014—over 133 percent of the FPL. Individuals in this  expansion population were previously covered under a local program  for which the District of Columbia did not receive federal matching  funds.
Wisconsin was approved to expand its plan to an estimated 35,000  childless adults, providing them with benefits, such as physician and  hospital services.
The fourth state, Missouri, was also approved to redirect a portion of its  DSH allotment for new purposes established under the demonstration,  including, among other things, providing coverage to previously ineligible  populations. Missouri was also allowed to redirect a portion of its DSH  funds for payments for other purposes, as authorized under the  demonstration, including payments to health clinics that provided ambulatory services to  uninsured and indigent populations in and near St. Louis; payments for administrative costs—nonhospital services—to a health  commission, which will coordinate, monitor, submit reports on the  demonstration’s activities, and make recommendations for payment  allocations; a program that educated patients on primary care and proper use of  the initiation of a coverage expansion pilot that would provide a limited  primary care benefit package and test the use of a voucher system to  provide acute hospital services when needed by individuals in the pilot  expansion population.
section_title: HHS Approved a Global Cap for One State’s Demonstration
paragraphs: This program worked with uninsured individuals that come to the emergency rooms and  educated them on available resources for primary/non-emergent care, scheduled follow- up appointments with primary care providers, and arranged transportation to  appointments. These services were coordinated while the individuals were in the  emergency room. The costs—both state and federal—for this program could not exceed  $175,000 per year for 2 years of the demonstration or $700,000 per year for 3 years.
1115 demonstration, and multiple other Medicaid waivers. According to  HHS, this consolidation would allow Rhode Island to seamlessly provide  services to individuals who previously had to qualify to receive services,  such as home and community-based services through different programs  that were governed by different rules and authorities. The state’s proposal  indicated that this flexibility would allow the state to better manage the  use of long-term care and increase home and community-based services.  Through the demonstration, the state also was given the flexibility to  make certain programmatic changes to its Medicaid program without  having to follow more formal procedures. For example, for certain  changes, such as those that would otherwise need to be processed as an  amendment to the Medicaid state plan or to the demonstration terms and  conditions or that did not affect eligibility or benefits, the state was  allowed to only notify HHS of the change.was the first time they approved a test of this type of administrative  flexibility.
section_title: HHS’s Approvals Allowed Three States to Use Medicaid Funds to Continue Coverage to Expansion Populations
paragraphs: Idaho, Michigan, and New Mexico were required by federal law to  discontinue using CHIP funds to cover childless adults, but were allowed  to continue services for this population with Medicaid funds under a new  section 1115 demonstration. These three states each applied and  received approval for new demonstrations to continue to provide  coverage to childless adults, without expanding to any new populations.  Under these demonstrations, various types of benefits were provided to  the childless adult populations. For example, Idaho was approved to  provide premium assistance for qualifying employer-sponsored insurance,  while Michigan and New Mexico were approved to provide coverage for  services. Michigan was approved to limit benefits to outpatient services,  and New Mexico was approved to provide coverage for both inpatient and  outpatient services.
section_title: States Were Approved to Implement Different Coverage Strategies and New Cost Sharing on Certain Populations through the Demonstrations
paragraphs: All 10 states we reviewed were approved to implement new ways of  expanding coverage or imposing cost sharing requirements on different  Medicaid populations. Examples of these strategies are presented below.
Arizona’s demonstration allowed, for a limited time, the state to  charge expansion enrollees a fee when they miss a physician  appointment in order to encourage proper use of medical services.  The demonstration also allowed the state to impose cost sharing for  non-emergency use of the emergency room, as well as higher cost  sharing for brand name drugs when a generic is available.
Indiana’s demonstration allowed the state to establish a high- deductible health plan and health care spending account for  uninsured adults enrolled for coverage under the demonstration.  Expansion enrollees must make specified contributions to their  accounts, based on income levels, as a condition of continued  enrollment. The accounts must be used by enrollees to pay for the  cost of health care services until a deductible is reached; however,  preventive services up to a maximum amount would be exempt from  this requirement. The spending account was intended to provide  incentives for participants to utilize services in a cost-efficient manner.  This demonstration also allowed the state to impose an enrollment  cap on the number of childless adult expansion enrollees for its health  savings account program.
Three states—Idaho, Michigan, and New Mexico—were approved to  continue some coverage strategies from their previous  demonstrations.demonstration required a 50 percent employer contribution toward the  cost of the health benefit plan. Michigan’s demonstration allowed the  state to continue to provide a limited benefit package that focused on  outpatient services and required prior authorization for some of these  services. Finally, New Mexico’s demonstration allowed the state to  cap medical expenditures for each enrollee.
For example, Idaho’s premium assistance
Rhode Island was allowed to form and pay for entities dedicated to  reviewing the needs of enrollees eligible for long-term care. According  to the state’s proposal, this process facilitated the appropriate care  setting by shifting care away from high-cost institutional settings when  less costly home and community-based care was appropriate. The  organization did this by helping enrollees decide how to manage their  health care needs based on a distinction given to them as “highest  need,” “high need,” or “preventive.” This designation allowed the state  to determine which cost-effective, long-term services an enrollee  could receive. For example, those designated as highest need were  approved to receive nursing home care, while those designated as  preventive were approved to receive certain home health services.
section_title: For 4 of 10 Reviewed Demonstrations, HHS’s Policy and Process for Approving Spending Limits Did Not Provide Assurances That Demonstrations Will Not Increase Federal Costs
paragraphs: For 4 of 10 demonstrations we reviewed, HHS approved spending limits  that were based on assumptions of cost growth that were higher than  those reflected by the state’s historical spending and the President’s  budget. In addition, in some cases the approved spending limits included  costs in the base year that were hypothetical. If HHS had held spending  limits in the four demonstrations to levels suggested by its policy, we  estimate that the spending limits would have been $32 billion lower over  the 5-year term of the demonstrations. We also found that HHS’s budget  neutrality policy is out-dated, because it does not reflect HHS’s current  processes or provide assurances that data used for spending limits are  reliable.
subsections: section_title: HHS Approved Spending Limits for Four States Based on Growth Projections That Exceeded Benchmarks and Included Hypothetical Costs, with Limited Support
paragraphs: HHS approved spending limits for the Arizona, Indiana, and Rhode Island  demonstrations that used growth rates that exceeded benchmark rates  and, in the case of Texas, included hypothetical costs in the base year  spending. HHS officials reported that their policy and process allow for  negotiations in determining spending limits, including adjustments to the  benchmark policy. However, HHS’s policy does not specify criteria and  methods for such adjustments or the documentation and support needed  for adjustments. We found that the criteria and methods for making the  adjustments in these states were not always clear or well supported. Our  estimates show that, had HHS used benchmark growth rates and actual  base year costs, the 5-year spending limits would have been almost   $32 billion dollars lower than what was actually approved. The federal  share of the $32 billion reduction would constitute an estimated   $21 billion. (See table 1.)
HHS departed from its policy in selecting base year expenditures and  benchmark growth rates for the approved Arizona spending limit without a  clear rationale. Had actual base year expenditures and benchmark  growth rates been used, the 5-year spending limit would have totaled  about $26 billion less. HHS established the largest portion of the Arizona  spending limit, per person spending, using an outdated baseline of  projections of the costs of operating the program without the  demonstration. The projections were based on the estimated costs of  operating the program developed for the state’s previous demonstration— initially approved in 1982—and adjusted forward to 2011. HHS’s policy  indicates that the spending limits for new demonstrations should be  based on actual expenditures in the base year. Arizona’s actual  expenditures in 2011—the base year for the demonstration had HHS  approved a spending limit based on its policy—were much lower than the  projected costs used by HHS as the basis of the spending limit. HHS  officials said that the agency was not able to estimate the cost of the  Arizona Medicaid program without the demonstration using recent actual  expenditure data, because the state’s Medicaid program had operated  under a demonstration since 1982. We found that HHS’s rationale for  relying on 30-year-old projections of what the Medicaid program would  have cost without the demonstration was unsupported. Actual  expenditure data were available and would more accurately reflect state  spending under Medicaid than the old projections that were based on the  state operating without a Medicaid program. We estimate that HHS’s use  of projected costs rather than actual expenditures for the base year  increased the spending limit by about $22 billion.
HHS’s approved spending limit for Arizona also used growth rates for  certain populations that were higher than the benchmark growth rates  suggested by agency policy. The rates HHS used reflected national  growth rates, which were higher than the state historical growth rates  based on actual state historical expenditures. (See table 2.) Instead, HHS  compared national growth rates to the projected state growth approved as  part of the state’s previous demonstration, developed 30 years earlier.  Officials also told us that they did not consider comparing the national  growth rates to the state’s historical growth rates derived from actual state  expenditures because it was unclear if these expenditures would have  occurred absent the demonstration. However, without the demonstration,  Arizona would not have a Medicaid program. In addition, the previously  approved rate does not appear to be a valid substitute given the large  difference between that rate and the growth rates indicated by actual  historical expenditure data. We estimate that HHS’s use of the previously  projected growth rates rather than actual state expenditures to derive the  benchmark growth rate increased the approved 5-year spending limit by  about $4.2 billion.
For the Indiana demonstration, HHS approved a spending limit that was  based on a projected growth rate that exceeded the benchmark growth  rate without clear support for doing so. Had HHS used the benchmark  growth rate, the demonstration’s 5-year spending limit would have been  an estimated $416 million lower. While HHS developed growth rates  based on only 3 of the 5 years of historical data, HHS documented that  the most recent 2 years of data reflected large decreases in spending  from the state’s increased use of managed care and that these changes  in spending were a onetime effect that likely would not continue. We  determined that HHS had adequately explained and documented its  reason for making this adjustment. However, we found that HHS did not  have adequate support for approving a 4.4 percent growth rate for all four  populations included in the demonstration, when the historical data  provided by the state showed benchmark growth rates that were lower  than 4.4 percent for three of those populations. (See table 3.) HHS  officials stated that a policy decision was made to use the average state  historical growth rates because it was believed that it was more likely to  reflect cost trends in the future. Officials added that one of the individual  populations had a zero growth rate historically and it was decided that as  a result of regular health care inflation, costs would grow. Approving an  average growth rate does not appear to be a valid substitute for the state  historical growth rates for each population given the significant difference  for the adult caretaker populations, and the fact that health care inflation  was present during prior years and would have also affected population- specific growth rates. Had HHS used benchmark growth rates for each  population, the spending limit would have been about $416 million lower  than the approved spending limit.
HHS approved an aggregate spending limit of about $12.1 billion for the  Rhode Island demonstration based on a growth rate that exceeded the  benchmark growth rate without clearly supporting the use of a higher  growth rate. Had HHS used the benchmark growth rate, we estimate that  the spending limit would have been about $772 million lower than the  approved limit. According to HHS officials, the spending limit was  developed using the 2006 base year average national growth rate of   7.8 percent; however, the state’s historical growth rate in the 5 years prior  to applying for the demonstration was 7.0 percent. HHS officials told us  that though the state provided data for 2007 to be used as the base year,  HHS instead chose 2006 as the base year, because negative trends in  the 2007 data were not representative, did not appear reliable, and  contained what they called outliers. So while HHS based the Rhode  Island spending limit on the lower of the two growth rates for 2006, the  agency could not provide clear support for using that base year. (See  table 4.)
In Texas, the HHS-approved spending limit included two types of  hypothetical costs in the state’s base year expenditures. These costs  represented higher payment amounts the state could have paid to  providers, but did not actually pay. We estimated that, had the state only  included actual expenditures as indicated by HHS’s policy, the spending  limit would have totaled about $4.6 billion less. HHS’s decision sets a  precedent that a state can increase a demonstration spending limit on the  basis that it could have hypothetically paid Medicaid providers more than  it actually chose to pay them, without a clear basis for doing so.
First, Texas’s spending limit was based, in part, on hypothetical costs as  opposed to actual incurred expenditures with respect to UPL payments  that could be made for inpatient hospital services but were not actually  made. Prior to applying for this demonstration, about 1.3 million of the  state’s Medicaid population received inpatient hospital services under  managed care, and the state did not make UPL payments for these  services. In its spending limit estimate, however, Texas included costs  for UPL payments and fee-for-service payments for beneficiaries  previously receiving inpatient hospital services under a managed care  delivery model. In its proposal, the state said it would take certain actions  in response to directives from its state legislature. Specifically, the state  said that if the demonstration was not approved by HHS it would carve  out inpatient hospital services previously provided under managed care  and pay for these services on a fee-for-service basis and also make UPL  payments for these services. These actions would increase costs  because fee-for-service payments and UPL payments to hospitals would  greatly exceed capitation payments made to managed care plans. HHS  officials stated that, given a directive of the Texas legislature, they  believed the state would do so, and they allowed the estimated increased  costs of such an arrangement to be factored into the spending limit even  though Texas had not changed its payment model. As a result,   $3.8 billion of the demonstration spending limit was based on what Texas  estimated it could pay providers in the future but had not been paying  prior to the demonstration.
Second, Texas proposed including additional hypothetical costs in the  base year expenditures by using the maximum amount of UPL payments  the state could have paid rather than the actual amount of payments the  state did make. In its proposal, the state documented that during each of  the 4 years leading up to and including the base year, the state’s actual  hospital inpatient UPL payments were less than the maximum amount the  state could have paid. HHS officials noted that because the actual  payments were accounting for an increasing percentage of the maximum  UPL payments the state could have made, they allowed the state to use  this larger amount. As a result of HHS’s decision, about $796 million of  the demonstration spending limit was based on a hypothetical  expenditure that did not represent actual expenditures of the state under  its program.
section_title: HHS Approved Spending Limits for Three Demonstrations Based on Actual DSH Expenditures and Followed Statutory Criteria in Approving Spending Limits for Three Other Demonstrations
paragraphs: HHS approved spending limits for three demonstrations that redirected  federal DSH funds, which were consistent with its policy. For the District  of Columbia, Missouri, and Wisconsin demonstrations, HHS limited  federal spending to the lower of the states’ DSH allotment or actual DSH  expenditures in the year prior to the demonstrations. This approach  helps provide assurances that the federal government will spend no more  under the demonstrations than what it would have spent without them.  For the District of Columbia and Missouri, HHS limited federal spending to  a specific dollar amount, which represented a portion of the states’ DSH  expenditures in the year prior to the demonstrations’ approvals. The  Wisconsin spending limit was set at the total DSH allotment, which also  represented the amount of expenditures in the year prior to the  demonstration’s approval. The approved spending limit for the entire  length of the demonstration was about $145 million for the District of  Columbia, $105 million for Missouri, and $797 million for Wisconsin.
The Idaho, Michigan, and New Mexico demonstrations were a unique  type of section 1115 demonstration governed by requirements not  applicable to other types of Medicaid section 1115 demonstrations. For  these three states, HHS set spending limits using a process provided for  under CHIPRA. These states applied and received approval for new  section 1115 demonstrations, through which they continued to cover  childless adults using Medicaid funds instead of CHIP funds. CHIPRA  also defined the budget neutrality process for such demonstrations by  identifying the base year and growth rates for demonstration spending  limits. For each of the three demonstrations, HHS followed the budget  neutrality procedures outlined in CHIPRA in setting the spending limit on  an annual basis. The initial annual spending limits were based on  expenditure projections of about $80,000 for Idaho, about $137 million for  Michigan, and about $177 million for New Mexico. For the first  demonstration year, spending limits were slightly less because the  demonstrations operated less than a full year.
section_title: HHS’s Policy Does Not Reflect Current Processes or Provide Assurances That Data Used for Developing Spending Limits Are Reliable
paragraphs: HHS’s policy for setting spending limits for proposed demonstrations is  inconsistent with its actual practices. To this extent, HHS’s internal  controls are insufficient. According to Standards for Internal Control in the  Federal Government, government processes, including management  directives and administrative policies, should be clearly documented.discussing documentation for HHS’s policy, published in 2001, officials  indicated that it reflected HHS’s most current processes and policy on   In  budget neutrality, but acknowledged that some aspects of the policy, as  written, were no longer applicable to current processes. For example,  HHS officials told us that the methods described for determining spending  limits of demonstration extensions were no longer applied. In addition,  while the policy requires that states submit 5 years of historical data in  developing spending limits—and HHS officials told us that this is their  preference—the agency’s current processes allow states to use data  based on the state’s estimate of spending or enrollment. For example, if  the 2 most recent years of expenditure data are not available because of  delays in Medicaid claims processing, estimates for these years can be  used. Officials indicated that if estimates are used instead of actual data,  the state must explain any adjustments. But HHS officials did not have  documentation for the current process or policy on when estimates are  allowed, or the type of documentation of adjustments that is required. In  addition, the HHS’s policy does not require documentation or describe  how the data used to set spending limits are reviewed to ensure reliability  and accuracy. According to officials, the data used for projecting spending  comes from each state’s Medicaid data system, and HHS generally does  not test the accuracy of the data. However, officials noted that the state  systems may have their own quality and reliability checks.
In October 2012, HHS introduced an optional waiver application template  that included a standard budget neutrality form that states could use to  submit 1115 demonstration applications. The template provides a  standard format for states to submit commonly used data elements—such  as historical expenditure and enrollment data, and the projected growth  rates and per capita costs based on the state historical enrollment and  costs—and a description of the sources and methods for obtaining state  historical data. The budget neutrality form allows states to submit actual  or estimated data. HHS officials told us that the new template does not  establish any new budget neutrality policy, but instead was intended to  make the application template more user-friendly than the prior template  that was developed in conjunction with the agency’s policy published in  2001. The new budget neutrality form reiterates HHS’s 2001 policy that  states that spending limits should be based on the lower of the state- specific historical growth rate or estimated nationwide growth rate. The  form does not provide additional guidance, for example, on the process  and criteria for when estimated state historical data rather than actual  state historical expenditure data are used in setting spending limits, or  when deviations from the benchmark policy are allowed and how they  should be documented and supported.
section_title: Conclusions
paragraphs: The fiscal challenges facing the federal government require prudent  stewardship of federal Medicaid resources. While section 1115 Medicaid  demonstrations serve as an important mechanism for states to implement  projects that allow for innovation while promoting Medicaid objectives,  HHS policy requires that they not expose the federal government to  additional financial liability. The Secretary of Health and Human Services  has an important responsibility for ensuring that comprehensive  demonstrations will not increase federal costs above what would be  incurred without these demonstrations. HHS’s long-standing budget  neutrality policy for these demonstrations, on its face, recognizes that  states should not be given access to additional federal funding at the  same time they are provided with greater program flexibility. However,  neither the policy, nor HHS’s implementation of it, ensures the prudent  stewardship of federal Medicaid spending.
After examining HHS’s approach for approving spending limits of recently  approved demonstrations, we have three main concerns regarding the  budget neutrality policy and process. First, HHS’s policy is not reflected in  its actual practices and, contrary to sound management practices, is not  adequately documented. Second, the policy and processes lack  transparency regarding criteria and the supporting evidence required to  justify deviations from historical spending and established benchmark  growth rates. We recognize that forecasting spending during changing  economic times is challenging and a state’s circumstances may warrant  such deviations. Nonetheless, we believe that approved spending limits  that are based on baselines and growth rate expectations that greatly  deviate from HHS’s current benchmarks should be well-supported and  documented. HHS’s policy is currently silent as to when deviations are  allowed and does not require that reliable evidence be provided to justify  deviations. Transparency around the basis for spending limit decisions is  important not only for assurances of the ongoing fiscal integrity and  sustainability of the program, but also for assurances of consistency of  approvals among states. Third, the policy as implemented allows  methods for establishing spending limits that we believe are inappropriate  for such purposes, such as allowing states to include hypothetical costs in  the baseline for spending limits. The second and third concerns parallel  those we have raised in earlier reports. In 2008, because HHS disagreed  that changes to the budget neutrality policy and review process were  needed, we suggested that Congress consider requiring increased  attention to fiscal responsibility in the approval of section 1115 Medicaid  demonstrations and require the Secretary of Health and Human Services  to improve the demonstration review process by, for example, clarifying  the criteria for approving spending limits and documenting and making  public the basis for such approvals. Thus far Congress has not acted on  this suggestion. On the basis of the findings in this report, we believe the  Secretary needs to take additional actions to ensure that HHS’s budget  neutrality policy reflects current practices and that the spending limits for  the Texas and Arizona demonstrations are appropriate, well supported,  and based on clear criteria.
section_title: Recommendations for Executive Action
paragraphs: To improve the transparency of the process for reviewing and approving  spending limits for comprehensive section 1115 demonstrations, we  recommend that the Secretary of Health and Human Services take the  following two actions:  1.  update the agency’s written budget neutrality policy to reflect actual  criteria and processes used to develop and approve demonstration  spending limits, and ensure the policy is readily available to state  Medicaid directors and others; and  2.  reconsider adjustments and costs used in setting the spending limits  for the Arizona and Texas demonstrations, and make appropriate  adjustments to spending limits for the remaining years of each  demonstration.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to HHS for comment. In its written  comments, HHS acknowledged that it has not always communicated its  budget neutrality policy broadly or clearly, but stated it has applied its  policy consistently. The Department suggested that recent steps to  increase transparency—such as publishing a new section 1115  application template and implementing a federal public input process— reflect updated policy on how HHS sets spending limits and ensures  demonstrations are budget neutral. While the application template may  contain guidance on some of the data elements commonly used to  demonstrate budget neutrality, we do not believe that it addresses how  HHS reviews the applications or the criteria used for setting spending  limits. We have revised our report to clarify how this template falls short of  clarifying HHS’s budget neutrality policy. HHS did not otherwise identify  any written policy it has issued since 2001 either during the course of our  review or in its comments.
HHS did not concur with our recommendation that its budget neutrality  policy should be updated to reflect the actual criteria and processes used  to develop and approve demonstration spending limits, and ensure that  the policy is readily available. HHS stated that our findings that four  states’ spending limits would have been lower had the agency followed its  policy were flawed. HHS said that we used only a subset of the best  available data that the Department used to assess budget neutrality and  that we relied on an outdated policy issued in 2001. We disagree with  these assertions. It is important to note that, to do our analysis, we relied  on extensive documentation and information that HHS officials specifically  provided us as the basis for the selected states’ budget neutrality  determinations. For example, we obtained the spreadsheets with the data  and calculations that HHS used to determine each state’s demonstration  spending limits. We reconciled these spreadsheets with the spending  limits and documentation in each state’s demonstration approval and had  numerous discussions with HHS officials to confirm our understanding of  the data and the basis for the final spending limits. At no time did officials  tell us that they had provided us only with a subset of the data used to  assess budget neutrality or cite additional information or data that we had  not considered. HHS’s assertion that we relied on an outdated budget  neutrality policy that did not reflect the Department’s current policy also  conflicts with information provided to us during the course of this review.  On multiple occasions, we discussed with officials the policy used to  establish demonstration spending limits, including the applicability of the  2001 written policy. HHS officials told us—both verbally and in writing— that the 2001 written policy generally reflected the Department’s current  policy toward budget neutrality. They told us that this document was the  most recent document capturing the budget neutrality policy. However, as  we described in the draft report, HHS officials told us that some parts of  the 2001 written policy were outdated. The Department did not have any  plans to update the 2001 policy.
HHS did not concur with our recommendation that it should make  adjustments to the spending limits for the remaining years of the Arizona  and Texas demonstrations. In its comments, HHS said that the  adjustments and costs it used were justified. However, HHS did not  provide any new information or support beyond what was considered and  discussed in the draft report. For example, HHS did not respond to our  concerns that Texas’ spending limit included $3.8 billion in costs that the  state could hypothetically pay providers in the future but did not actually  pay them prior to the demonstration. We continue to believe HHS’  decisions were not clear or well supported. HHS also stated that it had  significantly strengthened the accountability in Texas by requiring HHS  approval before federal matching funds can be drawn down for state  expenditures made under the demonstration, and by instituting robust  reporting requirements. We believe that improved oversight of actual  spending occurring under the demonstrations does not lessen the need  for establishing sound spending limits.
HHS’s comments are reproduced in appendix III. HHS also provided  technical comments, which we incorporated as appropriate.
As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies of this report to the  Secretary of Health and Human Services. In addition, the report is  available at no charge on the GAO website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-7114 or iritanik@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 listed in   appendix IV.
section_title: Appendix I: Summary of Submitted and Reviewed Applications for Comprehensive Section 1115 Medicaid Demonstrations
paragraphs: From January 2007 through May 2012, the Department of Health and  Human Services (HHS) received 62 comprehensive section 1115  Medicaid demonstration applications from 38 states, 3 of which were  subsequently withdrawn by the states. HHS approved 45 of the remaining  applications, disapproved 1, and another 13 were still pending completion  of review as of May 31, 2012. About two-thirds, or 31, of the 45 approved  applications were for extensions of existing demonstrations, while 8 of the  13 still under review were for new demonstrations. For the 46 reviews that  HHS completed, reviews took from 47 days to almost 4 years, and  averaged 323 days from the date of application to the date of the review  decision. About 72 percent of the reviews took a year or less to  complete. (See table 5.)
Officials with HHS stated that the nature of demonstration reviews is  unpredictable because of the different factors outside HHS’s control,  which can influence the review. Further, HHS generally does not have a  set time frame within which applications must be reviewed. There are a  number of factors that may have affected the review times for the  demonstrations we reviewed. For example, prior to applying for a new  demonstration, states may submit a concept paper to HHS to receive  technical assistance, advice, and other guidance. There may then be  extended dialogue between a state and HHS about the plans included in  a concept paper. The process can provide states with an initial indication  of the acceptability of their proposal and thereby facilitate the application  process. According to the officials, in cases where states have submitted  such papers, HHS reviews may be shorter. In addition, the purpose,  scale, and complexity of demonstration applications vary, and will result in  the need for more or less discussion between the state and HHS.  Similarly, the completeness of the application can affect review times.  Applications may have lacked important details, such as data on how the  program will be implemented, its effect on relevant beneficiary  populations, or how budget neutrality is achieved. In these cases HHS  may request extensive clarification, which adds to the review time  because of the time states need to respond. Also, HHS officials said that  state legislative activity can alter the proposal during development, or  midcourse, which would extend HHS review times.
section_title: Appendix II: A Summary of Key Features of Recent Demonstrations
paragraphs: This appendix summarizes key information on 10 new comprehensive  section 1115 demonstrations approved from January 2007 through May  2012. Key information presented includes: a summary of specific details  about the purpose of the demonstration; the population covered; the term  of each demonstration; the estimated number of people covered in the  first and last year of the demonstration; and the approved spending limit  over the term of each demonstration. Because the scope and purpose of  demonstrations vary by state, the amount and detail of the information  provided for each demonstration also varies.
subsections: section_title: Arizona Health Care Cost Containment System
paragraphs: Demonstration Term: October 2011–September 2016  Estimated Number of People Covered: first year: 1,129,869;   last year: 1,806,984  Approved Spending Limit: Over $74.4 billion  Arizona requested to terminate its previous section 1115 demonstration,  operating since 1982, in order to eliminate coverage for one of its adult  populations covered previously, and to implement an enrollment freeze  on its childless adults, effective in July 2011. The population that was to  be eliminated was covered through the Medical Expense Deduction  program, which was for adults with income in excess of 100 percent of  the federal poverty level (FPL) who have qualifying health care costs that  reduce their income to or below 40 percent of the FPL. The enrollment  freeze applied to adults without dependent children with family income up  to and including 100 percent of the FPL. This new demonstration  continued to provide coverage for the Medicaid population through  managed care. In addition, the state was approved to establish state a  funding pool for making supplemental payments, totaling over   $300 million per year, to providers that cover Medicaid and  uncompensated care costs, and to make hospital payments for trauma  and emergency services through a program that was originally a state- funded initiative. The demonstration also expanded coverage to certain  children up to age 19 and women who lose Medicaid pregnancy  coverage. The state increased personal financial responsibility through  cost sharing by implementing the use of penalties for certain enrollees  that miss scheduled physician appointments, and encouraging  appropriate utilization of emergency room care by imposing cost sharing  for improper use of the emergency room. The state also imposed higher  cost sharing for brand name drugs when a generic is available.
section_title: District of Columbia Childless Adults
paragraphs: Demonstration Term: November 2010–December 2013  Estimated Number of People Covered: first year: 4,815;   last year: 11,121  Approved Spending Limit: $145 million  The District of Columbia was approved to redirect Disproportionate Share  Hospital (DSH) funds in order to provide full Medicaid benefits to adults  ages 21 through 64 with incomes between 133 percent and 200 percent  of the FPL. Benefits under the demonstration were provided through a  mandatory managed care delivery system. Most anticipated enrollees  were covered previously through a local program that provided more  limited benefits.
section_title: Idaho Nonpregnant Childless Adults (Idaho Adult Access Card Demonstration)
paragraphs: Demonstration Term: January 2010–September 2014  Estimated Number of People Covered: first year: 350; last year: 350  Idaho was approved under a new demonstration to continue to provide  premium subsidies to nonpregnant childless adults age 18 and above  with incomes at or below 185 percent of the FPL. The demonstration  allows a premium subsidy up to $100 per month per enrolled adult—a  qualifying employee or the spouse of the employee—toward the  individual’s share of the employer-sponsored health insurance premium.  Participating employers are required to make a 50 percent contribution  toward the cost of the health benefit plan.
section_title: Healthy Indiana Plan
paragraphs: Demonstration Term: January 2008–December 2012  Estimated Number of People Covered: first year: 669,894;   last year: 848,919  Approved Spending Limit: $10.6 billion  Indiana received approval to operate two distinct health insurance  programs. This demonstration preserved the program previously in place  for Medicaid-eligible individuals and expanded coverage to uninsured  adults; both programs were run through a managed care delivery system.  The first program, called the Hoosier Healthwise Program, continued  coverage for current Medicaid-eligible individuals. The second program,  called Healthy Indiana Plan (HIP), expanded coverage for uninsured  adults, not currently eligible for Medicaid. The expansion was partially  funded using redirected DSH funding. The HIP provided a high-deductible  health plan and an account similar to a health savings account for  uninsured adults including low-income custodial parents and caretaker  relatives of Medicaid and State Children’s Health Insurance Program  (CHIP) children, and uninsured noncustodial parents and childless adults  ages 19 through 64 with incomes between 22 and 200 percent of the  FPL.
Participation in HIP is voluntary, but all enrollees are required to receive  medical care through the high-deductible health plans. HIP enrollees are  required to help fund the $1,100 deductible by contributing to a savings  account. These accounts are used by enrollees to pay for the cost of  health care services until the deductible is reached; however, preventive  services up to a maximum amount are exempt from this requirement. The  benefits available under HIP are limited to $300,000 annually, and   $1 million over a lifetime. The demonstration also included cost sharing  depending on income.
section_title: Michigan Childless Adults Waiver
paragraphs: Demonstration Term: January 2010–September 2014  Estimated Number of People Covered: first year: 74,379;   last year: 90,665  Michigan was approved under a new demonstration to continue providing  a limited ambulatory benefit package through a managed care delivery  system to low-income nonpregnant childless adults ages 19 through   64 years with incomes at or below 35 percent of the FPL. The benefit package included outpatient hospital services, physician services,  diagnostic services, pharmacy, mental health and substance abuse  services. Enrollees may be required to receive prior authorization before  accessing certain ambulatory services.
section_title: Missouri Gateway to Better Health
paragraphs: Demonstration Term: July 2010–December 2013  Estimated Number of People Covered:Approved Spending Limit: $105 million  Missouri was approved to redirect its DSH funding to pay for four main  activities in the St. Louis area: (1) health clinics that will provide services  to the uninsured; (2) a health commission to manage activities related to  the demonstration; and (3) a program to educate and encourage patients  to use primary care rather than the emergency room. Lastly, the state  was approved to expand coverage through a pilot that provides limited  primary care benefits and a voucher system to provide acute hospital  services to a population in the St. Louis area.
section_title: New Mexico State Coverage Insurance— Title XIX Component
paragraphs: Demonstration Term: January 2010–September 2014  Estimated Number of People Covered:Approved Spending Limit: $1.3 billion  New Mexico was approved under a new demonstration to continue to  provide coverage for nonpregnant childless adults. The eligible  population is nonpregnant childless adults ages 19 to 64 years with  incomes up to and including 200 percent of the FPL who are not eligible  for Medicaid. Enrollees receive a comprehensive benefit package through  a managed care delivery system in which premiums and copayments are  required. These premiums include up to $35 for higher-income childless  adults. The demonstration was designed to provide health care coverage  to uninsured individuals who are unemployed, self-employed, or  employed by an employer with 50 or fewer employees.
section_title: Rhode Island Global Consumer Choice Compact
paragraphs: Demonstration Term: January 2009–December 2013  Estimated Number of People Covered: first year: 192,778;   last year: 206,540  Approved Spending Limit: $12.1 billion  Rhode Island was approved to operate its entire Medicaid program under  a demonstration and to continue to provide coverage to populations that  were previously covered under several distinct waivers. Rhode Island  was allowed to redesign its Medicaid program to provide cost-effective  services that will ensure beneficiaries receive the appropriate services in  the least restrictive and most appropriate setting. For example, the state  was allowed to form and pay for entities dedicated to reviewing the needs  of enrollees eligible for long-term care. This organization helps enrollees  decide how to manage their health care needs based on a distinction  given to them as “highest need,” “high need,” or “preventive.” This  designation allows the state to determine which cost-effective long-term  services an enrollee can receive. For example, those designated as  highest-need individuals are approved to receive nursing home care while  those designated as preventive are approved to receive certain home  health services. The state was also approved to include other services  under the demonstration, such as parenting and childbirth education  classes, tobacco cessation services, and window replacement for lead- poisoned children.
section_title: Texas Healthcare Transformation and Quality Improvement Program
paragraphs: Demonstration Term: December 2011–September 2016  Estimated Number of People Covered: first year: 3,872,680;   last year: 4,767,680  Approved Spending Limit: $142 Billion  The Texas demonstration allowed the state to both expand the use of a  managed care delivery system to existing covered populations and to  preserve supplemental payments through the establishment of funding  pools. The state was allowed to claim approximately $29 billion over the  5-year term of the demonstration on these pool payments. One pool was  used to reimburse providers for uncompensated care costs, and the other  was used to provide incentive payments to participating hospitals that   The state also was  implement and operate delivery system reforms.approved to cover children’s primary and preventive Medicaid dental  services through a capitated statewide dental services program.
section_title: Wisconsin BadgerCare Plus for Childless Adults
paragraphs: Demonstration Term: January 2009–December 2013  Estimated Number of People Covered: first year: 25,129;   last year: 40,800  Approved Spending Limit: $797 million  Wisconsin obtained approval to redirect its DSH funding to expand  coverage to childless adults, who are defined as individuals between the  ages of 19 and 64 years with income that does not exceed 200 percent of  the FPL. The program included a variety of features: a requirement for  participants to complete a health needs assessment—used to match  enrollees with health maintenance organizations and providers that meet  the individual’s specific health care needs; tiering of health plans based  on quality of care indicators; and enhanced online and telephone  application tools that allow childless adults to choose from a variety of  health insurance options.
section_title: Appendix III: Comments from the Department of Health and Human Services
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Tim Bushfield, Assistant Director;  Susan Barnidge; Shirin Hormozi; Carolyn Feis Korman; Drew Long;   Tom Moscovitch; Pauline Seretakis; and Hemi Tewarson made key  contributions to this report.
section_title: Related GAO Products
paragraphs: High-Risk Series: An Update. GAO-13-283. Washington, D.C.: February  2013.
Medicaid: More Transparency of and Accountability for Supplemental  Payments Are Needed. GAO-13-48. Washington, D.C.: November 26,  2012.
Medicaid: States Reported Billions More in Supplemental Payments in  Recent Years. GAO-12-694. Washington, D.C.: July 20, 2012.
Medicaid Demonstration Waivers: Recent HHS Approvals Continue to  Raise Cost and Oversight Concerns. GAO-08-87. Washington, D.C.:  January 31, 2008.
Medicaid Demonstration Waivers: Lack of Opportunity for Public Input  during Federal Approval Process Still a Concern. GAO-07-694R.  Washington, D.C.: July 24, 2007.
Medicaid Waivers: HHS Approvals of Pharmacy Plus Demonstrations  Continue to Raise Cost and Oversight Concerns. GAO-04-480.  Washington, D.C.: June 30, 2004.
Medicaid: Improved Federal Oversight of State Financing Schemes Is  Needed. GAO-04-228. Washington, D.C: February 13, 2004.
SCHIP: HHS Continues to Approve Waivers That Are Inconsistent with  Program Goals. GAO-04-166R. Washington, D.C.: January 5, 2004.
Medicaid and SCHIP: Recent HHS Approvals of Demonstration Wavier  Projects Raise Concerns. GAO-02-817. Washington, D.C.: July 12, 2002.
Medicaid Section 1115 Waivers: Flexible Approach to Approving  Demonstrations Could Increase Federal Costs. GAO/HEHS-96-44.  Washington, D.C.: November 8, 1995.
Medicaid: States Use Illusory Approaches to Shift Program Costs to  Federal Government. GAO/HEHS-94-133. Washington D.C.: August 1,  1994.