Medicaid Financing: Long-standing Concerns about Inappropriate State Arrangements Support Need for Improved Federal Oversight
Published: 2008-04-03T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Medicaid, a joint federal-state program, financed the health care for about 59 million low-income people in fiscal year 2006. States have considerable flexibility in deciding what medical services and individuals to cover and the amount to pay providers, and the federal government reimburses a portion of states' expenditures according to a formula established by law. The Centers for Medicare & Medicaid Services (CMS) is the federal agency responsible for overseeing Medicaid. Growing pressures on federal and state budgets have increased tensions between the federal government and states regarding this program, including concerns about whether states were appropriately financing their share of the program. GAO's testimony describes findings from prior work conducted from 1994 through March 2007 on (1) certain inappropriate state Medicaid financing arrangements and their implications for Medicaid's fiscal integrity and (2) outcomes and transparency of a CMS oversight initiative begun in 2003 to end such inappropriate arrangements.
section_title: What GAO Found
paragraphs: GAO has reported for more than a decade on varied financing arrangements that inappropriately increase federal Medicaid matching payments. In reports issued from 1994 through 2005, GAO found that some states had received federal matching funds by paying certain government providers, such as county-operated nursing homes, amounts that greatly exceeded established Medicaid rates. States would then bill CMS for the federal share of the payment. However, these large payments were often temporary, since some states required the providers to return most or all of the amount. States used the federal matching funds obtained in making these payments as they wished. Such financing arrangements had significant fiscal implications for the federal government and states. The exact amount of additional federal Medicaid funds generated through these arrangements is unknown, but was in the billions of dollars. Because such financing arrangements effectively increase the federal Medicaid share above what is established by law, they threaten the fiscal integrity of Medicaid's federal and state partnership. They shift costs inappropriately from the states to the federal government, and take funding intended for covered Medicaid costs from providers, who do not under these arrangements retain the full payments. In 2003, CMS began an oversight initiative that by August 2006 resulted in 29 states ending one or more inappropriate financing arrangements. Under the initiative, CMS sought satisfactory assurances that a state was ending financing arrangements that the agency found to be inappropriate. According to CMS, the arrangements had to be ended because the providers did not retain all payments made to them but returned all or a portion to the states. GAO reported in 2007 that although CMS's initiative was consistent with Medicaid payment principles, it was not transparent in implementation. CMS had not used any of the means by which it normally provides states with information about Medicaid program requirements, such as the published state Medicaid manual, standard letters issued to all state Medicaid directors, or technical guidance manuals. Such guidance could be helpful by informing states about the specific standards used for reviewing and approving states' financing arrangements. In May 2007, CMS issued a final rule that, if implemented, would, among other things, limit Medicaid payments to government providers' costs. We have not reviewed the substance of the May 2007 rule. The extent to which the May 2007 rule would respond to GAO's concerns about the transparency of CMS's initiative and review standards will depend on how CMS implements it.

section_title: Letter
paragraphs: I am pleased to be here today as you explore recent regulatory actions of  the administration related to the Medicaid program and the potential  impacts of these actions on beneficiaries, providers, and states. Medicaid,  a joint federal and state program that covered over 59 million people in  fiscal year 2006, fulfills a crucial role in providing health coverage for a  variety of vulnerable populations, including certain low-income children,  families, and individuals who are aged or disabled. Ensuring the program’s  long-term sustainability is therefore very important.
The federal government and the states share responsibilities for financing  and administering Medicaid. Within broad federal requirements, states  have considerable flexibility in deciding what medical services and  individuals to cover and the amount to pay providers, and the federal  government reimburses a portion of states’ expenditures according to a  formula established by law. The Centers for Medicare & Medicaid  Services (CMS) is the federal agency responsible for overseeing states’  Medicaid programs and ensuring the propriety of expenditures for which  states seek federal reimbursement. Total Medicaid expenditures are  significant, totaling an estimated $317 billion in fiscal year 2006.
Growing pressures on federal and state budgets have increased tensions  between the federal government and the states regarding Medicaid. In  recent years, tensions have arisen regarding CMS’s actions in overseeing  the appropriateness of provider payments for which states have sought  federal reimbursement, including whether states were appropriately  financing their share, that is, the nonfederal share of these payments.  Starting in the early 1990s and as recently as 2004, we and others have  reviewed aspects of inappropriate Medicaid financing arrangements in  some states, often involving supplemental payments made to government  providers that were beyond states’ typical Medicaid payment rates. We  have also reviewed CMS’s oversight of such arrangements, most recently  reporting in March 2007 on an initiative started in 2003 to end  inappropriate arrangements. Since 2007, CMS has issued a series of  proposed or final rules related to payments for certain Medicaid services.
These rules are the subject of H.R. 5613—which would place a  moratorium on the rules—and of today’s hearing. One of those rules,  issued as a final rule in May 2007, relates to a body of work GAO has  conducted since the early 1990s on state Medicaid financing arrangements.  In my testimony today, I will summarize and describe our findings on (1)  past inappropriate state Medicaid financing arrangements, including their  implications for the fiscal integrity of the Medicaid program, and (2) the  outcomes and transparency of CMS’s 2003 initiative, which provides  context for considering the effect of the May rule on various stakeholders.  My testimony is based on our previous work assessing various Medicaid  financing arrangements and federal oversight of these arrangements. We  conducted this body of work from June 1993 through March 2007. We have  not reported on the proposed and final rules that are addressed in H.R.  5613, with respect to the operation of the Medicaid program. We  conducted our work in accordance with generally accepted government  auditing standards.
In summary, we have reported for more than a decade on varied financing  arrangements that inappropriately increase federal Medicaid matching  payments. In reports issued from 1994 through 2005, we reported on  various arrangements whereby states received federal matching funds by  paying certain government providers, such as county-owned or county- operated nursing homes, amounts that greatly exceeded standard  Medicaid rates. The large payments were often temporary, since some  states could require the government providers to return all or most of the  money to the states. States used the federal matching funds received for  these payments—which essentially made a round-trip from the states to  providers and back to the states—at their own discretion. Such financing  arrangements had significant fiscal implications for the federal  government and states. The exact amount of additional federal Medicaid  funds generated through these arrangements is not known, but was in the  billions of dollars. Despite congressional and CMS action taken during  those years to limit such arrangements, we found even in recent years that  improved federal oversight of such arrangements was still needed.  Because such financing arrangements effectively increase the federal  Medicaid share above what is established by law, they threaten the fiscal  integrity of Medicaid’s federal and state partnership. They shift costs  inappropriately from the states to the federal government, and take  funding intended for Medicaid beneficiaries and covered Medicaid costs  from providers, who do not under these arrangements retain the full  payments.
CMS’s oversight initiative, started in 2003 to end inappropriate state  financing arrangements, by August 2006 had resulted in 29 states ending  one or more financing arrangements in which providers did not retain the  supplemental payments they received. Although we found that CMS’s  initiative was consistent with Medicaid payment principles, we also found  that more transparency was needed regarding the way in which CMS was  implementing its initiative and the review standards it was using to end  certain financing arrangements. For example, to inform states about the  specific standards it used for reviewing and approving states’ financing  arrangements under its new initiative, CMS had not used any of the means  by which it typically provides information to states about new or revised  Medicaid program requirements, such as proposed rule making, its  published state Medicaid manual, standard letters issued to all state  Medicaid directors, and technical guidance manuals. Consequently, states  were concerned about standards that were applied in CMS’s review of  their arrangements and the consistency with which states were treated.  These observations provide some context for the controversy surrounding  CMS’s May 2007 rule. We have not assessed this rule, or others addressed  by H.R. 5613, with respect to the operation of the Medicaid program. . The  extent to which the May 2007 rule would respond to concerns about the  transparency of CMS’s initiative and review standards will depend on how  CMS implements it.
subsections: section_title: Background
paragraphs: Title XIX of the Social Security Act establishes Medicaid as a joint federal- state program to finance health care for certain low-income, aged, or  disabled individuals. Medicaid is an open-ended entitlement program,  under which the federal government is obligated to pay its share of  expenditures for covered services provided to eligible individuals under  each state’s federally approved Medicaid plan. States operate their  Medicaid programs by paying qualified health care providers for a range of  covered services provided to eligible beneficiaries and then seeking  reimbursement for the federal share of those payments.
CMS has an important role in ensuring that states comply with certain  statutory Medicaid payment principles when claiming federal  reimbursements for payments made to institutional and other providers  who serve Medicaid beneficiaries. For example, Medicaid payments by law  must be “consistent with efficiency, economy, and quality care,” and  states must share in Medicaid costs in proportions established according  to a statutory formula.
Within broad federal requirements, each state administers and operates its  Medicaid program in accordance with a state Medicaid plan, which must  be approved by CMS. A state Medicaid plan details the populations a  state’s program serves, the services the program covers (such as  physicians’ services, nursing home care, and inpatient hospital care), and  the rates of and methods for calculating payments to providers. State  Medicaid plans generally do not detail the specific arrangements a state  uses to finance the nonfederal share of program spending. Title XIX of the  Social Security Act allows states to derive up to 60 percent of the  nonfederal share from local governments, as long as the state itself  contributes at least 40 percent.
Over the last several years, CMS has taken a number of steps to help  ensure the fiscal integrity of the Medicaid program. These include making  internal organizational changes that centralize the review of states’  Medicaid financing arrangements and hiring additional staff to review each  state’s Medicaid financing. The agency also published in May 2007 a final  rule related to Medicaid payment and financing. This rule would, among  other things, limit payments to government providers to their cost of  providing Medicaid services. Congress has imposed a moratorium on this  rule until May 25, 2008.
section_title: Concerns about Certain Medicaid Financing Arrangements That Undermine Medicaid’s Fiscal Integrity Are Long-standing
paragraphs: From 1994 through 2005, we have reported numerous times on a number  of financing arrangements that create the illusion of a valid state Medicaid  expenditure to a health care provider. Payments under these arrangements  have enabled states to claim federal matching funds regardless of whether  the program services paid for had actually been provided. As various  schemes have come to light, the Congress and CMS took several actions  from 1987 through 2002, through law and regulation, to curtail them (see  table 1).
Many of these arrangements involve payment arrangements between the  state and government-owned or government-operated providers, such as  local government-operated nursing homes. They also involved  supplemental payments—payments states made to these providers  separate from and in addition to those made at a state’s standard Medicaid  payment rate. The supplemental payments connected with these  arrangements were illusory, however, because states required these  government providers to return part or all of the payments to the states.  Because government entities were involved, all or a portion of the  supplemental payments could be returned to the state through an IGT.  Financing arrangements involving illusory payments to Medicaid providers  have significant fiscal implications for the federal government and states.  The exact amount of additional federal Medicaid funds generated through  these arrangements is not known, but was in the billions of dollars. For  example, a 2001 regulation to curtail states’ misuse of the UPL for certain  provider payments was estimated to have saved the federal government  approximately $17 billion from fiscal year 2002 through fiscal year 2006. In  2003, we designated Medicaid to be a program at high risk of  mismanagement, waste, and abuse, in part because of concerns about  states’ use of inappropriate financing arrangements.
subsections: section_title: Inappropriate Medicaid Financing Arrangements Undermine Medicaid’s Fiscal Integrity
paragraphs: States’ use of these creative financing mechanisms undermined the  federal-state Medicaid partnership as well as the program’s fiscal integrity  in at least three ways.
First, inappropriate state financing arrangements effectively increased the  federal matching rate established under federal law by increasing federal  expenditures while state contributions remain unchanged or even  decrease. Figure 1 illustrates a state’s arrangement in place in 2004 in  which the state increased federal expenditures without a commensurate  increase in state spending. In this case, the state made a $41 million  supplemental payment to a local government hospital. Under its Medicaid  matching formula, the state paid $10.5 million and CMS paid $30.5 million  as the federal share of the supplemental payment. However, after receiving  the supplemental payment the hospital transferred back to the state  approximately $39 million of the $41 million payment, retaining just   $2 million. Creating the illusion of a $41 million hospital payment when  only $2 million was actually retained by the provider enabled the state to  obtain additional federal reimbursements without effectively contributing  a nonfederal share—in this case, the state actually netted $28.5 million as a  result of the arrangement.
Second, CMS had no assurance that these increased federal matching  payments were retained by the providers and used to pay for Medicaid  services. Federal Medicaid matching funds are intended for Medicaid- covered services for the Medicaid-eligible individuals on whose behalf  payments are made. However, under these arrangements payments for  such Medicaid-covered services were returned to the states, which could  then use the returned funds at their own discretion. In 2004, we examined  how six states with large supplemental payment financing arrangements  involving nursing homes used the federal funds they generated. As in the  past, some states deposited excessive funds from financing arrangements  into their general funds, which may or may not be used for Medicaid  purposes. Table 2 provides further information on how states used their  funds from supplemental payment arrangements, as reported by the six  states we reviewed in 2004.
Third, these state financing arrangements undermined the fiscal integrity  of the Medicaid program because they enabled states to make payments to  government providers that could significantly exceed their costs. In our  view, this practice was inconsistent with the statutory requirement that  states ensure that Medicaid payments are economical and efficient.
section_title: CMS Oversight Initiative to End State Financing Arrangements Lacked Transparency
paragraphs: Our March 2007 report on a recent CMS oversight initiative to end certain  financing arrangements where providers did not retain the payments  provides context for CMS’s May rule. Responding to concerns about  states’ continuing use of creative financing arrangements to shift costs to  the federal government, CMS has taken steps starting in August 2003 to  end inappropriate state financing arrangements by closely reviewing state  plan amendments on a state-by-state basis. As a result of the CMS  initiative, from August 2003 through August 2006, 29 states ended one or  more arrangements for financing supplemental payments, because  providers were not retaining the Medicaid payments for which states had  received federal matching funds.
We found CMS’s actions under its oversight initiative to be consistent with  Medicaid payment principles—for example, that payment for services be  consistent with efficiency, economy, and quality of care. We also found,  however, that CMS’s initiative to end inappropriate financing  arrangements lacked transparency, in that CMS had not issued written  guidance about the specific approval standards for state financing  arrangements. CMS’s initiative was a departure from the agency’s past  oversight approach, which did not focus on whether individual providers  were retaining the supplemental payments they received. In contacting the  29 states that ended a financing arrangement from August 2003 through  August 2006 under the initiative, only 8 states reported that they had  received any written guidance or clarification from CMS regarding  appropriate and inappropriate financing arrangements. CMS had not used  any of the means by which it typically provides information to states about  the Medicaid program, such as its published state Medicaid manual,  standard letters issued to all state Medicaid directors, or technical  guidance manuals, to inform states about the specific standards it used for  reviewing and approving states’ financing arrangements. State officials  told us that it was not always clear what financing arrangements CMS  would allow and why arrangements approved in the past would no longer  be approved. Twenty-four of 29 states reported that CMS had changed its  policy regarding financing arrangements, and 1 state challenged CMS’s  disapproval of its state plan amendment, in part on the grounds that CMS  changed its policy regarding payment arrangements and should have done  so through rule making. The lack of transparency in CMS’s review  standards raised questions about the consistency with which states had  been treated in ending their financing arrangements. We consequently  recommended that CMS issue guidance to clarify allowable financing  arrangements.
Our recommendation for CMS to issue guidance for allowable financing  arrangements paralleled a recommendation we had made in earlier work  reviewing states’ use of consultants on a contingency-fee basis to  maximize federal Medicaid revenues. Problematic projects where claims  for federal matching funds appeared to be inconsistent with CMS’s policy  or with federal law, or that—as with inappropriate supplemental payment  arrangements—undermined Medicaid’s fiscal integrity, involved Medicaid  payments to government entities and categories of claims where federal  requirements had been inconsistently applied, were evolving, or were not  specific. We recommended that CMS establish or clarify and communicate  its policies in these areas, including supplemental payment arrangements.  CMS’s responded that clarifying guidance was under development for  targeted case management, rehabilitation services, and supplemental  payment arrangements.
We have ongoing work to examine the amount and distribution of states’  Medicaid supplemental payments, but have not reported on the May 2007  rule or other rules related to Medicaid financing issued this year. Certain  elements of the May 2007 rule relate to the concerns our past work has  raised. Some aspects of the final rule appear to be responsive to  recommendations from our past work, to the extent that its  implementation could help ensure that Medicaid providers, on whose  behalf states’ receive federal matching funds, retain the payments made by  the state. The extent to which the rule would address concerns about the  transparency of CMS’s initiative and review standards will depend on how  CMS implements it.
section_title: Concluding Observations
paragraphs: As the nation’s health care safety net, the Medicaid program is of critical  importance to beneficiaries and the providers that serve them. The federal  government and states have a responsibility to administer the program in a  manner that ensures that expenditures benefit those low-income people  for whom benefits were intended. With annual expenditures totaling more  than $300 billion per year accountability for the significant program  expenditures is critical to providing those assurances. Ensuring the  program’s long-term fiscal sustainability is important for beneficiaries,  providers, states, and the federal government.
For more than a decade, we have reported on various methods that states  have used to inappropriately maximize federal Medicaid reimbursement,  and we have made recommendations to end these inappropriate financing  arrangements. Supplemental payments involving government providers  have resulted in billions of excess federal dollars for states, yet  accountability for these payments—assurances that they are retained by  providers of Medicaid services to Medicaid beneficiaries—has been  lacking. CMS has taken important steps in recent years to improve its  financial management of Medicaid, yet more can be done.
Mr. Chairman, this concludes my prepared statement. I will be happy to  answer any questions that you or members of the subcommittee may have.
section_title: Contact and Acknowledgments
paragraphs: For information regarding this testimony, please contact James Cosgrove  at (202) 512-7114 or cosgrovej@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this testimony. Katherine Iritani, Assistant Director; Carolyn Yocom,  Assistant Director; Ted Burik; Tim Bushfield; Tom Moscovitch; and   Terry Saiki also made key contributions to this testimony.
section_title: Related GAO Products
paragraphs: Medicaid Financing: Long-Standing Concerns about Inappropriate State  Arrangements Support Need for Improved Federal Oversight.   GAO-08-255T. Washington, D.C.: November 1, 2007.
Medicaid Financing: Federal Oversight Initiative Is Consistent with  Medicaid Payment Principles but Needs Greater Transparency.   GAO-07-214. Washington, D.C.: March 30, 2007.
High-Risk Series: An Update. GAO-07-310. Washington, D.C.: January  2007.
Medicaid Financial Management: Steps Taken to Improve Federal  Oversight but Other Actions Needed to Sustain Efforts. GAO-06-705.  Washington, D.C.: June 22, 2006.
Medicaid: States’ Efforts to Maximize Federal Reimbursements  Highlight Need for Improved Federal Oversight. GAO-05-836T.  Washington, D.C.: June 28, 2005.
Medicaid Financing: States’ Use of Contingency-Fee Consultants to  Maximize Federal Reimbursements Highlights Need for Improved  Federal Oversight. GAO-05-748. Washington, D.C.: June 28, 2005.
Medicaid: Intergovernmental Transfers Have Facilitated State  Financing Schemes. GAO-04-574T. Washington, D.C.: March 18, 2004.
Medicaid: Improved Federal Oversight of State Financing Schemes Is  Needed. GAO-04-228. Washington, D.C.: February 13, 2004.
Major Management Challenges and Program Risks: Department of  Health and Human Services. GAO-03-101. Washington, D.C.: January  2003.
Medicaid: HCFA Reversed Its Position and Approved Additional State  Financing Schemes. GAO-02-147. Washington, D.C.: October 30, 2001.
Medicaid: State Financing Schemes Again Drive Up Federal Payments.  GAO/T-HEHS-00-193. Washington, D.C.: September 6, 2000.
Medicaid in Schools: Improper Payments Demand Improvements in  HCFA Oversight. GAO/HEHS/OSI-00-69. Washington, D.C.: April 5, 2000.
Medicaid in Schools: Poor Oversight and Improper Payments  Compromise Potential Benefit. GAO/T-HEHS/OSI-00-87. Washington,  D.C.: April 5, 2000.
Medicaid: States Use Illusory Approaches to Shift Program Costs to  Federal Government. GAO/HEHS-94-133. Washington, D.C.: August 1,  1994.
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