Medicaid: Federal Guidance Needed to Address Concerns About Distribution of Supplemental Payments
Released: 2016-03-07T00:00:00


Highlights: section_title: Why GAO Did This Study
paragraphs: In 2012, GAO reported that 505 hospitals received Medicaid payments that resulted in Medicaid payment surpluses—that is, payments that exceeded the costs of providing services—of about $2.7 billion. These surpluses were due in part to the lump-sum supplemental payments hospitals received that were above their regular payments for individual services. States made them under broad Medicaid payment authorities that allow federal matching on payments up to an upper payment limit or under Medicaid demonstrations. These types of supplemental payments are authorized, but not required, by law.

GAO was asked to examine how hospitals used revenues from large supplemental payments and the states' basis for distributing the payments. For four selected states making large payments and 12 hospitals receiving them, GAO examined (1) how these hospitals used revenues from the payments and (2) the basis on which the states distributed the payments. GAO reviewed documents authorizing payments and interviewed hospital, state and federal officials. GAO also obtained payment data for 2009, the year hospitals were identified as having large payments, and for 2012, the most recent year available.

section_title: What GAO Found
paragraphs: Not all selected hospitals in the four states GAO reviewed tracked their use of revenues from the large supplemental payments they received and tracking of revenues is generally not required. Based on information obtained from hospital officials and a review of demonstration approval documents, GAO determined that the revenues were used for a broad range of purposes. For example,

Officials from nine selected hospitals that received large supplemental payments under three states' traditional state Medicaid programs reported using revenues—which resulted in average surpluses of about $39 million—to cover the costs of uninsured patients as well as funding general hospital operations, maintenance, and capital purchases, such as a helicopter.

Hospitals in two selected states that GAO reviewed that were approved to make supplemental payments under Medicaid demonstrations were subject to certain tracking requirements to ensure payment revenues were used for approved demonstration purposes. Documentation for one state showed that approved uses of revenues included hospitals' uncompensated costs of serving underinsured or uninsured individuals and operating poison control centers. In the other state, which moved during the study timeframe from making supplemental payments under a traditional Medicaid program to under a demonstration, payments were allowed for purposes such as incentivizing health care delivery system improvements and for uncompensated costs for physician and clinic services, and drugs.

Three selected states distributed Medicaid supplemental payments largely based on the availability of local government funds to finance the nonfederal share of the payments, rather than on the services the hospitals provided. Medicaid payments should be made for Medicaid services or, if under demonstrations, for demonstration purposes and be economical and efficient. GAO found that three states made supplemental payments based on the ability of hospitals, or their local governments, to finance the nonfederal share. Consequently, hospitals otherwise eligible for payments but whose local government could not finance them did not receive them. The Centers for Medicare & Medicaid Services (CMS), which oversees Medicaid, communicated in writing to one state two key principles regarding payment distribution: (1) payments should be distributed based on Medicaid or demonstration purposes, and (2) payments should not be made based on the availability of local financing. However, CMS has not provided written guidance to articulate or broadly communicate these requirements to all states. Federal internal controls standards stress the need for effective communications with external stakeholders that have a significant impact on the agency achieving its goals. The absence of written guidance may result in inconsistent application of CMS's policies among states, the distribution of supplemental payments that are counter to the agency's policies and not aligned with the program's purposes, and the potential for states to overpay or underpay providers depending on the availability of local government financing.

In commenting on a draft of this report, HHS concurred with the first recommendation and agreed with GAO's concerns regarding the second recommendation but did not explicitly concur with it.

section_title: What GAO Recommends
paragraphs: GAO recommends that CMS issue written guidance clarifying its policies that (1) supplemental payments should be linked to the provision of Medicaid services and (2) payments should not be contingent on the availability of local financing.

section_title: Letter
paragraphs: Medicaid, a joint federal-state health care program that provides health  care coverage for low-income and medically needy individuals, involves  significant and growing expenditures for the federal government and  states. In fiscal year 2015, it is estimated that Medicaid covered, on  average, approximately 69 million beneficiaries at an estimated cost of  $529 billion. States administer their own Medicaid programs within broad  federal requirements under the oversight of the Centers for Medicare &  Medicaid Services (CMS), an agency of the Department of Health and  Human Services (HHS). While states establish provider payment rates for  certain mandatory and optional services they may cover, the federal  government provides matching funds for these services, but only for  amounts up to what Medicare would pay for comparable services. This  limit on the payment amount that the federal government will match is  called the Medicaid Upper Payment Limit (UPL). States make payments  to hospitals for services rendered to individual Medicaid beneficiaries, but  these payments are often below what Medicare would pay; consequently,  many states also receive federal matching funds for supplemental  payments to hospitals, which states often make to certain hospitals to  increase the hospitals’ payments. Such payments, commonly known as  UPL supplemental payments, generally are not based on actual claims for  services to individual beneficiaries.

In recent years states have increasingly made other types of  supplemental payments to hospitals under section 1115 of the Social  Security Act. Section 1115 authorizes the Secretary of Health and Human  Services to waive certain federal Medicaid requirements and allow costs  that would not otherwise be eligible for federal matching funds for  experimental, pilot, or demonstration projects that, in the Secretary’s  judgment, are likely to assist in promoting Medicaid objectives.  Specifically, HHS may grant states authority to operate a Medicaid  “demonstration project” under section 1115, allowing them to test new  approaches for delivering health care services, by waiving certain  statutory requirements and authorizing types of payments not otherwise  available for federal matching funds, including through the approval of  demonstration supplemental payments. Certain states have received  approval to make demonstration supplemental payments and ended their  UPL supplemental payments. HHS has authorized demonstration  supplemental payments for purposes such as paying hospitals for  uncompensated care costs and making incentive payments for broad  health care improvements.

UPL and demonstration supplemental payments (collectively referred to  hereafter as supplemental payments) are authorized, though not explicitly  required, by law. Unlike regular claims-based payments, which are made  in response to a provider’s submission of a claim for the provision of a  covered service to a particular patient, states have some flexibility to  target these supplemental payments to a small number of providers and  generally make these payments on a monthly, quarterly, or annual lump- sum basis. In fiscal year 2013, states made more than $22 billion in these  supplemental payments—an increase of about $8 billion (58 percent)  over fiscal year 2010—mainly to hospitals. We designated Medicaid as a  high-risk program in 2003 in part due to the program’s size, growth, and  concerns about the transparency and oversight of supplemental  payments.

We reported in November 2012 that 39 states made supplemental  payments that resulted in 505 hospitals having Medicaid payment  surpluses—that is, total Medicaid payments in excess of the hospitals’  total costs of providing Medicaid services. Medicaid surpluses in the 39  states totaled about $2.7 billion. In some cases, supplemental payments  to individual hospitals resulted in Medicaid surpluses of tens of millions of  dollars, raising questions about how states making such large  supplemental payments determined the payment amounts and how the  hospitals used the revenue associated with these large payments. Under  federal requirements, Medicaid payment amounts are not limited to the  providers’ costs of providing services; however, unless specifically  authorized for other uses under a demonstration, the payments must be  for allowable Medicaid expenditures—Medicaid services provided to  Medicaid beneficiaries—and federal law requires that they be economical,  efficient, and sufficient to ensure that beneficiaries’ access to care is  comparable to that of the general population. While federal law limits the  amount of federal funding available for payments to providers, providers  are generally not restricted in how they use the revenue from the  payments, except where a Medicaid demonstration imposes conditions  on such uses to promote Medicaid objectives.

You asked us to provide information on how hospitals have used  supplemental payments and how states determined how much in  supplemental payments to pay hospitals. For selected states and  hospitals with large Medicaid surpluses that resulted from supplemental  payments, this report provides information on:  (1)  hospitals’ use of revenues from large UPL and demonstration  supplemental payments they received, and  (2)  the basis on which selected states distributed UPL and demonstration  supplemental payments to hospitals.

To address our objectives, we selected a nongeneralizable sample of four  states based on an analysis of disproportionate share hospital (DSH)  payment audit report data, the only federal data source with facility- specific supplemental payment information, which we obtained from CMS  for 2009 (the most recently available audited data showing Medicaid  surpluses at the time of our selection). We selected two states whose  hospitals had the highest aggregate Medicaid surplus (Florida and Texas)  and two states whose hospitals had the highest average Medicaid surplus  per hospital (New Mexico and Oklahoma).

To determine how hospitals used the revenues from large supplemental  payments they received, we first identified and selected the three  hospitals within each selected state with the highest total Medicaid  surplus stemming from supplemental payments. We interviewed officials  from these hospitals about how they used the revenues from the  supplemental payments they received in 2009 (the base year for selecting  states and hospitals) and 2012 (the most recent year for which we  estimated that, at the time of our work, hospital Medicaid cost and  payment data would be available) and obtained and reviewed available  payment and cost information and other relevant data on state  supplemental payments for the two review years. In 2009, three of the  four selected states—New Mexico, Oklahoma, and Texas—administered  their Medicaid supplemental payment programs under state plan authority  and made UPL supplemental payments to 9 selected hospitals. The  remaining state, Florida, operated under the terms and conditions of a  Medicaid demonstration and made demonstration supplemental  payments to 3 selected hospitals. Beginning in fiscal year 2012, one  selected state (Texas) was approved by HHS to end its UPL payments  and begin making supplemental payments under the authority of a  Medicaid demonstration. During 2012, 6 of 12 selected hospitals received  payments under a demonstration. For these two states, we also reviewed  the terms and conditions of their demonstrations to identify any  requirements for tracking, reporting on, and approved uses of the  payments.

To examine the basis on which selected states distributed hospital  payments, we interviewed state Medicaid officials about their distribution  methodologies and reviewed relevant state documents, including  documents authorizing the payments, state regulations and policies  related to supplemental payments, and state summary reports on their  allocation methodologies. We also analyzed state data on the amounts  paid to individual hospitals for both 2009 and 2012. We determined that  the data we obtained from CMS and the states were reliable for purposes  of our review by checking the data for discrepancies and omissions,  comparing the data to other publicly available data, and communicating  with officials to resolve any identified discrepancies. As part of our review,  we also examined the extent to which CMS’s oversight of states’  distribution methods was consistent with standards for internal control in  the federal government—specifically, the standard related to information  and communications. We also reviewed federal laws, regulations, and  agency policy documents, and interviewed CMS officials.

We conducted this performance audit from October 2013 to February  2016 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: Within broad federal requirements, each state administers and operates  its Medicaid program in accordance with a Medicaid state plan, which  must be approved by CMS. A state plan describes the groups of  individuals to be covered; the methods for calculating payments to  providers, including which types of providers are eligible to receive  payments; and the categories of services covered. Federal law identifies  broad categories of services that states must cover, such as inpatient  hospital services, nursing facility services, and physician services, and  also many categories of services that states can cover at their own  option, such as home- and community-based long-term care services,  physical therapy, or optometry. Any changes a state wishes to make in  its Medicaid plan, such as establishing new Medicaid payments (including  supplemental payments) to providers or changing methodologies for  payment rates for services, must be submitted to CMS for review and  approval as a state plan amendment. In reviewing state plan  amendments to ensure that state provisions are consistent with federal  Medicaid requirements, CMS reviews and approves payment  methodologies and does not review actual payments for individual  providers. CMS communicates Medicaid program requirements to states  through federal regulations, a published State Medicaid Manual, standard  letters issued to all state Medicaid directors, and technical guidance on  particular topics.

Under federal Medicaid requirements, federal Medicaid matching funds  are available for state payments made for Medicaid-covered services  provided to Medicaid beneficiaries. While payments are not limited to  the costs of providing services, payments made to a provider under a  state plan must be economical and efficient and within the Medicaid UPL,  which is the ceiling on the amount of federal matching funds a state can  claim for certain services. The UPL is based on an estimate of what  Medicare would have paid for comparable services. Because states’  regular Medicaid payments are often lower than what Medicare would pay  for similar services, states are able to make UPL supplemental payments,  and the federal government shares in the payments to the maximum  amount allowed under the UPL (see figure 1).

The UPL is not a provider-specific limit but instead is applied on an  aggregate basis for certain provider ownership types and categories of  services. Each state must calculate a separate UPL for each  combination of provider ownership type and category of service to  determine the maximum amount of UPL payments that it can make for  each ownership-service type combination. States may establish multiple  UPL supplemental payment programs and hospitals may receive UPL  supplemental payments from more than one of these programs.  Approval to make new payments and apply other eligibility criteria is  obtained through the state plan amendment process, which requires CMS  review and approval. CMS’s review and approval role does not extend to  reviewing the specific manner in which states distribute payments,  including which individual providers receive payments, the amount of the  payments, or how providers spend the payments they receive. Under the  flexibility of the Medicaid UPL, some states have targeted UPL  supplemental payments to a small number of hospitals within a particular  category. For example, in 2012, we reported that a large share of UPL  supplemental payments were concentrated on a small number of  hospitals and in many cases resulted in Medicaid surpluses. We  concluded that payments that greatly exceeded Medicaid costs raised  questions about the purpose of the payments, including how they related  to Medicaid services and if they are economical and efficient. In 2015,  we reported that CMS lacked a policy and process to determine if  payments to individual providers are economical and efficient, and we  recommended that CMS develop criteria to assess payments to individual  providers and develop a process to identify and review them. HHS agreed  and reported that the agency is taking action to respond to our  recommendation.

States may also administer parts of their Medicaid programs under the  authority of section 1115 of the Social Security Act, which authorizes the  Secretary to waive certain federal Medicaid requirements and allow costs  that would not otherwise be eligible for federal matching funds for  experimental, pilot, or demonstration projects that, in the Secretary’s  judgment, are likely to assist in promoting Medicaid objectives. In recent  years an increasing number of states have received permission from HHS  to make supplemental payments under Medicaid demonstrations.  Supplemental payments under a Medicaid demonstration are made  according to the terms and conditions approved by HHS for the  demonstration and may include reporting or other requirements that do  not apply to UPL supplemental payments authorized under the Medicaid  state plan.

States and the federal government share in the financing of Medicaid  payments according to a formula established in law. States finance the  nonfederal share of their Medicaid programs primarily with state funds,  particularly state general funds appropriated to the state Medicaid  agency. Within certain limits, however, states may also use other sources  of funds—including funds from local government providers, such as  county-owned or county-operated hospitals, or from local governments on  behalf of government providers. For example, local government  providers and local governments can provide Medicaid funding to the  state via fund transfers, known as intergovernmental transfers. Federal  law allows states to finance up to 60 percent of the nonfederal share from  local government funds. This limit is applied in the aggregate—that is,  across each state’s entire Medicaid program—and not for individual  payments or categories of service. Under federal law, states cannot lower  the amount, duration, scope, or quality of Medicaid services provided due  to a lack of funds from local sources. We recently reported that states  have increasingly relied on local governments to fund the nonfederal  share of state Medicaid payments, particularly for supplemental  payments.

section_title: Not All Selected Hospitals Tracked How They Used Revenues from Their Supplemental Payments, but Described Uses Included Uninsured Costs and Capital Purchases
paragraphs: Selected hospitals that received large UPL supplemental payments under  state plans in three of four selected states did not account specifically for  the use of revenue from these payments in their financial systems, as  they were not required to do so. But hospital officials described various  uses of the revenue, such as defraying the costs of treating the uninsured  and the costs of capital purchases. Selected hospitals that received large  Medicaid payments in two of four selected states were required to track  spending and allowed to use payments for purposes such as uninsured  costs.
subsections: section_title: Selected Hospitals Receiving Large UPL Payments Did Not Track Specific Use of Revenues; Officials Described Non- Medicaid Uses Such As Uninsured Costs and Equipment Purchases
paragraphs: Officials from all nine of our selected hospitals that received large UPL  supplemental payments under state plans in three of the four states in our  review reported that they did not track how they used the excess revenue  from the UPL payments they received, nor were they required to do so.  These surpluses reflect the amount that total Medicaid payments, which  include regular Medicaid and supplemental payments, exceeded  Medicaid costs and were significant for the selected hospitals. For  example, in 2009, the Medicaid surpluses for the nine hospitals ranged  from $400,000 to more than $77 million, with average Medicaid surpluses  of about $39 million. Although supplemental payments to these hospitals  amounted to tens or hundreds of millions annually and are generally paid  on a lump sum, quarterly, or annual basis, officials told us that their  financial systems do not separately identify the supplemental payment  revenues or track the costs to which supplemental payments are applied.  Rather, these officials said the UPL supplemental payments are treated  as revenue along with other payments the hospital receives, and  revenues are not segregated for specific purposes. Although hospitals did  not track the UPL supplemental payment revenues, hospital officials were  able to describe some of the general purposes for which the revenues,  including the Medicaid surpluses resulting from the large payments, were  used. Hospital officials described purposes such as defraying the costs of  treating uninsured patients, contributing to specific capital purchases, and  making general improvements to community access to care and services.  Officials from several hospitals described more than one purpose for  which the UPL supplemental payments and resulting Medicaid surpluses  were used. (See table 1.)

Hospital officials from seven of nine selected hospitals in these three  states said they used the revenues from the large UPL supplemental  payments they received in part to cover the costs of providing services to  uninsured patients. Federal Medicaid law explicitly authorizes one type of  Medicaid supplemental payment—Medicaid DSH supplemental  payments—for which states can claim federal matching funds for the  costs of treating uninsured patients. The amount of federal funding each  state may claim for DSH supplemental payments is limited by federal law,  as each state is subject to a federal DSH allotment that establishes the  maximum federal funding available for DSH payments. These limits,  however, do not restrict hospitals from using available revenues to cover  the costs of providing services to uninsured patients. While officials with  the seven hospitals were unable to specify how much of their UPL  supplemental payments, including their Medicaid surpluses, were used to  cover the costs of uninsured patients, the amount of federal funds above  the states’ federal DSH allotments that were available to the hospitals for  spending on the uninsured could be significant. For example, for New  Mexico, Oklahoma, and Texas, statewide Medicaid surpluses due to UPL  supplemental payments exceeded $400 million in federal funds in 2009,  which is significant compared to these states’ DSH allotments of just over  $1 billion in the same year. In New Mexico and Oklahoma, the federal  share of Medicaid surpluses due to UPL payments actually exceeded the  states’ federal DSH allotments. (See table 2.)

Several hospital officials described other uses of revenues from UPL  supplemental payments, including funding general hospital operations  and maintenance; capital projects, such as new facilities; and equipment  purchases, such as new imaging equipment. Although hospital officials  were able to describe multiple purposes for which they used revenues  from Medicaid surpluses resulting from large UPL supplemental  payments, they were unable to specify how much was used for each  purpose they described. Examples of specific expenses cited by hospital  officials include the following:

A New Mexico hospital official described a variety of capital expenses  for which revenues from UPL payments, in part, were used. Examples  included constructing new medical office buildings, constructing a new  cancer treatment center, opening a new health clinic, purchasing a  new CT scanner, purchasing a new X-ray imaging system, and  purchasing a new helicopter to transport patients. Although hospital  officials could not estimate how much of the Medicaid surplus was  devoted to capital investment, the surplus was significant compared to  the amount of its capital investments. For example, in 2009 this  hospital had a Medicaid surplus of about $16 million. The budget for  its capital investments totaled $24.6 million that year. The hospital  reported an overall profit exceeding $5 million each in 2009 and 2012.

Officials with a Texas hospital described the establishment of new  outpatient clinics for both primary care and some specialty services,  extension of clinic hours, and capital expenses as the types of  services and projects that it would not have been able to provide or  complete without the supplemental payments it received. Although  hospital officials could not estimate how much of the Medicaid surplus  was devoted to capital investment, the surplus was significant  compared to its capital investments. For example, in 2009, this  hospital had a Medicaid surplus of nearly $78 million. That same year  the hospital spent $100 million for construction of a new patient tower  that included new operating rooms, emergency rooms, examination  rooms, isolation rooms, three floors of patient rooms, administration  offices, and waiting rooms.

section_title: Selected Hospitals Receiving Large Medicaid Demonstration Supplemental Payments Were Required to Track Spending and Allowed to Use Payments for Purposes Such As Uninsured Costs
paragraphs: Under Medicaid demonstrations, states were approved to make Medicaid  supplemental payments to hospitals for costs and activities not otherwise  covered under Medicaid to promote Medicaid objectives, and hospitals  were required to track how they used these payments. Specifically, the  two states in our review that operated under demonstrations, Florida and  Texas, were authorized to make new types of supplemental payments to  hospitals for hospitals’ uncompensated care costs associated with  Medicaid-enrolled and uninsured patients, and Texas was also authorized  to make incentive payments for broadly targeted improvements to  hospitals’ health care delivery systems. Florida began its Medicaid  demonstration in fiscal year 2006 and Texas began its demonstration in  fiscal year 2012. When the states began making demonstration  supplemental payments to hospitals, they ended the hospitals’ UPL  supplemental payments, although they continued to make DSH  payments.

Hospitals in both states receiving demonstration supplemental payments  for uncompensated care costs were subject to certain payment limits and  reporting requirements, and overall spending approved for  uncompensated care costs was higher than the federal limits would have  been without the demonstration. In addition, the terms of the  demonstrations allowed the states to include costs not otherwise eligible  for Medicaid reimbursement under the demonstration. The terms and  conditions of the demonstrations established a facility-specific limit on  hospital payments. In particular, hospitals could not receive more in  payments than their actual uncompensated care costs, including new  costs allowed under the demonstration. The Texas demonstration allowed  hospitals to include uncompensated care costs beyond those that the  state could have covered without the demonstration, including  uncompensated costs for physician services, clinic services, and  prescription drugs. Further, the Florida demonstration allowed hospitals to  include uncompensated care costs for underinsured individuals with  private insurance as well as for the cost of operating poison control  centers, costs that the state could not have covered without the  demonstration. Hospitals were required to report their estimated Medicaid  and uninsured costs and payments to the state, using an approved  methodology, as a condition of receiving payment, so that the amount of  uncompensated care costs could be determined. Hospitals are subject  to a verification of actual costs and payments when final data for the year  become available, and any payments above costs are required to be  returned to the state. The federal spending levels approved by HHS  under demonstrations in Florida and Texas for 2012 allowed additional  uncompensated care spending that was more than double the amount of  each state’s DSH allotment—the statutory limit on the amount of federal  funds a state may receive for hospital uncompensated care that would  have applied had the demonstration not been approved.

Hospitals in Texas receiving incentive payments for health care delivery  system improvements under that state’s Medicaid demonstration were  required to develop an implementation plan and report their progress in  meeting designated milestones. To receive the incentive payments,  referred to as Delivery System Reform Incentive Payments (Incentive  Payments), participating hospitals must develop a plan, subject to CMS  and state approval, that identifies the specific projects that they plan to  implement, from a menu of options, along with data-driven milestones  that hospitals must reach in order to receive full payment. Incentive  payments could be made for various projects, such as improving care for  patients with certain conditions or increasing delivery system capacity.  The terms and conditions of the demonstration included specific reporting  requirements to track incentive payments—for example, reports to CMS  that include both hospital-specific incentive payment amounts and  summary information about the delivery system improvements the  payments incentivized. A March 2015 report conducted for the Medicaid  and CHIP Payment and Access Commission found that: comprehensive  data was lacking to evaluate the outcomes from state spending on  incentive payments, states have pursued incentive payment programs to  preserve the federal matching funds from their UPL supplemental  payment programs, and supplemental payment spending under  demonstrations on incentive payments has exceeded prior levels of  spending on UPL supplemental payments in some states.

section_title: Three Selected States Made Supplemental Payments Based on Ability of Hospitals or Local Governments to Finance the Payments; Federal Written Guidance On Appropriate Basis for Such Payments Is Lacking
paragraphs: The bulk of supplemental payments in three of four selected states we  reviewed were distributed to hospitals based on the availability of funding  from hospital or local government contributions toward the nonfederal  share of the payments, rather than the volume of services each hospital  provided. We also identified instances in which actual payments to  providers were contingent on the availability of such funding. However,  CMS has not issued written guidance to articulate and broadly  communicate its policy regarding the appropriate basis for states’  distribution of supplemental payments or regarding the practice of making  payments contingent on the availability of local financing.
subsections: section_title: Three of Four Selected States Largely Based Their Supplemental Payments on the Availability of Local Financing Rather Than on Medicaid Services Provided
paragraphs: Our review of state documentation shows that in three of four selected  states—New Mexico, Texas, and Florida—the bulk of the supplemental  payments to hospitals were made contingent on these hospitals or the  relevant local governments providing funds to finance the nonfederal  share of the payments the hospitals received, rather than Medicaid  services they provided. Each of these states had multiple supplemental  payment programs—that is, separate payments for different ownership  types and categories of service—and the rules regarding which hospitals  would receive payments and the amounts of the payments were  established through a combination of Medicaid state plan provisions,  state administrative code provisions, other state requirements, or, in the  case of states operating under Medicaid demonstrations, through the  funding protocols approved for the demonstration. Specifically:  In New Mexico, the amount of a hospital’s UPL supplemental payment  from two of the five supplemental payment programs in the state was  determined by the amount of local government funds provided to  finance the nonfederal share. The New Mexico state plan established  that, to be eligible for the payments, hospitals must provide a “valid  request” to the state Medicaid agency. To be valid, this request had to  include a letter from the local government authority indicating its level  of financial support, up to a maximum limit, which determined the  amount of each hospital’s supplemental payment. The state plan  section for New Mexico’s largest supplemental payment program  stated that if the hospital does not submit a valid request, then the  hospital is not eligible for a supplemental payment even if the hospital  was otherwise eligible. In 2009, a total of about $207 million of the  state’s supplemental payments was distributed based on the  availability of local funding, and, in 2012, $233 million in supplemental  payments was distributed based on these requirements. In contrast,  the state distributed about $39 and $38 million in supplemental  payments in 2009 and 2012 through three other supplemental  payment programs for which the nonfederal share was funded by  state revenue, according to state officials. These payment programs  distributed payments based on measures related to the purpose of the  payments, such as the number of medical residents.

In Texas, the state’s administrative code specified that payments from  the state’s three largest UPL supplemental payment programs in 2009  were to be distributed based on the amount of local funding provided.  Specifically, the Texas Administrative Code specified that for these  supplemental payments the nonfederal share of the payments will be  obtained through intergovernmental transfer of public funds and the  amount of the payment to the hospital will be calculated in proportion  to the amount of the funds transferred by the hospital to the state. In  2009, about $2.3 billion in supplemental payments was distributed  under these three programs. The remaining $100 million in  supplemental payments that year was distributed through two smaller,  state-funded supplemental payment programs based in part on each  hospital’s level of Medicaid services provided. In 2012, Texas made  two types of supplemental payments under a Medicaid  demonstration—uncompensated care payments and incentive  payments for health care delivery system improvements—and the  terms and conditions of the demonstration established that the  nonfederal share for both types of payments would be financed by  funds from local government hospitals or local governments, such as  counties or hospital districts. The terms established that hospitals  receiving payments for uncompensated care costs or incentive  payments must be part of an organization called a Regional  Healthcare Partnership, which is led by a public hospital or a local  governmental entity that provides local funding of the nonfederal  share. The local government hospitals or entities were required to  submit a plan showing how much funding they could provide, with  payment amounts determined by the amount of funds contributed for  the nonfederal share.

In Florida, for most hospitals receiving supplemental payments under  its demonstration in 2009 and 2012, supplemental payments were  largely distributed based on the availability of funding for the  nonfederal share from the local government hospitals or local  governments on their behalf. The terms and conditions of the state’s  Medicaid demonstration established that local government funding  was an allowed source of funds for the nonfederal share of the  supplemental payments but did not specify how hospitals’ payment  amounts would be determined. Florida created a complex funding  relationship between large public hospitals that funded the entire  nonfederal portion of estimated payments (for all hospitals, including  those that are not required to fund the nonfederal share) and other  hospitals that might receive payments, according to state officials.  Based on 2012 payment data provided by the state, we found that  hospitals that provided intergovernmental transfers of funds for their  nonfederal share received significantly more, on average, in total  payments than hospitals that were not required to finance the  payments. The hospitals providing intergovernmental transfers of  funds received supplemental payments equal to the nonfederal share  plus a small percentage of the federal share. The state used the  remaining portion of the federal share to fund the nonfederal share of  demonstration supplemental payments for other hospitals—usually  smaller, private, or rural hospitals, according to state officials. These  other payments were distributed to the hospitals based on factors  other than the availability of local funding, such as Medicaid patient  volume. In 2009, a total of about $712 million of the state’s  supplemental payments was distributed based on the availability of  local funding, and, in 2012, $823 million in supplemental payments  was distributed based on these requirements. In contrast, the state  distributed about $140 million and $96 million in supplemental  payments in 2009 and 2012, respectively, to hospitals that were not  required to provide the nonfederal share of the payments.

In contrast to these three states, the fourth state we reviewed, Oklahoma,  did not base hospital payment amounts on the availability of local  government funds to finance the nonfederal share, according to state  officials. The state had multiple supplemental payment programs in which  payments were based on hospitals’ Medicaid workload or other factors.  According to state officials, state general funds were used to finance the  nonfederal share for all but one of the state’s supplemental payment  programs. For the remaining supplemental payment program, the  nonfederal share was financed by revenue from a hospital provider tax,  and each hospital’s supplemental payment was based on its relative  Medicaid workload.

In the three states that based supplemental payments on the availability  of local funds—Florida, New Mexico, and Texas—we found that over 90  percent of the total amount of supplemental payments in 2009 and 2012  was made based on the availability of local funds to finance the  nonfederal share. Specifically, based on our review of state documents  governing the distribution of supplemental payments, we found that in  2009, over $3.2 billion, or 92 percent of the total $3.5 billion in  supplemental payments the three states made that year, was based on  the contribution of local funds; in 2012, $4.9 billion, or 97 percent of the  total $5.0 billion in supplemental payments, was based on the contribution  of local funds. The amount and proportion of supplemental payments  made by states that were distributed to hospitals based on the availability  of local funds varied among the three states, although in each state the  large majority of payments was distributed in this manner. (See table 3.)

Distributing payments only to hospitals that are capable of financing the  nonfederal share of the payment can result in payments that are not  made to otherwise eligible hospitals that lack the ability to finance the  expected nonfederal share of the payment, or to obtain local government  support for such financing. Because most of the supplemental payments  to hospitals in the three states were made to hospitals only if there was  local funding to support the nonfederal share of the payment, some  hospitals that would otherwise have been eligible for the payments did not  receive them. We found examples in New Mexico and Texas of hospitals  that did not receive a payment, or received a smaller payment, because  the hospital or local government did not provide an intergovernmental  transfer of funds, or provided a smaller contribution to the nonfederal  share than expected. For example, several hospitals in New Mexico  received no UPL supplemental payment, or smaller supplemental  payments than usual, from the state in 2012 because of the inability of  certain local counties to provide the nonfederal share. In Texas, there  have been several hospitals each year that did not receive a payment, or  received a partial payment, due to their lack of local funds to provide a  contribution to the nonfederal share, according to Texas Medicaid  officials. In 2009, when Texas was still making UPL supplemental  payments to rural hospitals, there were 18 rural hospitals that were  otherwise eligible for the payments but that did not receive a payment  because, according to state officials, local funding was not provided for  the nonfederal share. In 2012, after Texas converted its supplemental  payments to a demonstration, there were 7 hospitals for which the state  did not make a demonstration supplemental payment for uncompensated  care because, according to state officials, these hospitals did not provide  local funding for the nonfederal share.

This method of distributing payments may also result in payments that are  not necessarily aligned with the level of hospitals’ low-income patient  workloads, as measured by their hospitals’ patient volume or costs  associated with serving low-income or uninsured individuals. In the case  of demonstration supplemental payments for hospitals’ Medicaid and  uninsured uncompensated care costs, some hospitals with large  uncompensated costs associated with serving the Medicaid and low- income population received relatively little in demonstration supplemental  payments for uncompensated care. Other hospitals with relatively low  uncompensated care costs received large supplemental payments  relative to those costs. Still others received uncompensated care  payments under the Medicaid demonstration even though they had no  uncompensated care costs before receiving the payment. For example:  In 2012, one hospital in Florida had about $352 million in  uncompensated care costs and received $384 million in  demonstration supplemental payments for those costs, for which local  funding of the nonfederal share was provided on the hospital’s behalf,  in addition to $77 million in DSH payments. In contrast, another  hospital with about $121 million in uncompensated care costs—which  was the fourth-highest amount of uncompensated care costs among  hospitals that year—had no local funding provided on its behalf and  received no such payments.

In 2012, among Texas hospitals that had uncompensated Medicaid  and uninsured costs and were eligible to receive a demonstration  supplemental payment for uncompensated care, the extent to which  the hospitals’ uncompensated care costs were covered by the  payments varied widely based on the availability of local funding, from  0 percent for the 7 hospitals that were otherwise eligible but did not  receive a payment, to more than 100 percent for 44 other hospitals,  based on data provided by the state.

section_title: CMS Has Not Clearly or Broadly Communicated Written Guidance to Clarify Its Policy Regarding the Appropriate Distribution of Supplemental Payments
paragraphs: CMS guidance regarding the basis on which states can distribute both  demonstration and UPL supplemental payments is lacking. CMS has not  issued written guidance articulating its policy regarding appropriate bases  for making such payments to ensure they are linked to Medicaid  purposes. While CMS has recently acted to curtail one state’s  demonstration supplemental payments because the state based the  payments on the availability of local financing, it has not taken steps to  clarify and broadly communicate to all states guidance regarding  appropriate payment distribution methodologies. Specifically, in April of  2015, CMS sent a letter to Florida raising concerns about the state’s  demonstration supplemental payments, including concerns that the  state’s supplemental payments were being distributed based on access to  local government funds and not distributed based on services provided to  Medicaid patients. In a May 2015 letter, CMS stated that it will work with  the state to develop a distribution methodology for demonstration  supplemental payments that more closely aligns with providers’ roles in  serving the Medicaid population and in providing other uncompensated  care authorized under the demonstration. Florida officials told us that  CMS officials worked closely with the state to develop a distribution  methodology that ensured the payments were not contingent on local  financing and were made only for covered demonstration services,  including raising regular payment rates for all hospitals and reducing the  size of the supplemental payments that were targeted to those hospitals  financing the nonfederal share.

According to CMS officials, the May 2015 letter represents a developing  national policy regarding demonstration supplemental payments—that is,  that they should be based on the provision of services to Medicaid and  uninsured individuals rather than on the availability of local funding. CMS  stated that it had contacted affected states with demonstrations that  include supplemental payments for uncompensated care to articulate the  policy principles the agency would use when reviewing the states’  demonstrations for potential renewal. CMS also said it articulated the  types of independently conducted impact analyses and information that a  state would need to provide, as part of any request to renew the  demonstration, in order for CMS to assess the role supplemental  payments had in promoting Medicaid objectives. Apart from  communicating directly with these states, CMS’s communication of its  policy at a national level has consisted of posting the Florida letter on its  website. CMS officials have not said whether they plan to issue guidance  more broadly that would provide clarity around its policy and how it is  applied for all states, including states that may be contemplating seeking  demonstration authority for similar arrangements.

For UPL supplemental payments made under state Medicaid plans rather  than demonstrations, CMS officials also told us that the agency has not  issued guidance on how states should distribute these payments.  Although CMS has not issued guidance to the states, CMS officials told  us that, when approving state plan provisions, they expect states to  include a Medicaid metric, such as Medicaid volume, in their  supplemental payment distribution methodology. CMS officials told us the  agency plans to issue a proposed rule later in the spring of 2016 to  specify appropriate methodologies for state distribution of UPL  supplemental payments to ensure the payments are consistent with  economy and efficiency. Because the proposed rule was under  development as of December 2015, details regarding the payment  distribution methodologies that will be articulated in the rule were not  available at the time of our review.

CMS also lacks guidance regarding how states demonstrate that  supplemental payments are not contingent on the availability of local  financing. CMS officials told us that the agency interprets federal law and  regulation as prohibiting states from making payments contingent on the  availability of local funding. In particular, federal law requires a state plan  to provide assurances that a lack of funds from local sources to finance  the nonfederal share will not result in lowering the amount, duration,  scope, or quality of Medicaid services provided under the plan in any part  of the state. Officials told us that in reviewing state plan amendments,  they require states to remove language that would make providers’  receipt of a payment contingent on local funding of the nonfederal share.  However, as shown by our review, there are instances in which  supplemental payments to providers under state plans are being made  contingent on the availability of local financing, suggesting that states lack  a common understanding of CMS’s interpretation of the law as prohibiting  this practice. According to CMS officials, the agency has not issued  written guidance articulating to states that payments should not be  contingent on the availability of local funds. Officials said the agency  instead instructs states to remove contingent financing language from  their state plans. CMS officials stated that they would expect providers to  alert them if payments are not sufficient to ensure access and providers  have generally not done so.

The absence of written guidance to states is inconsistent with federal  standards for internal control. Specifically, federal information and  communications standards state that for an entity to run and control its  operations, it must have relevant, reliable, and timely communications  relating to internal as well as external events. Information is needed  throughout the agency to achieve all of its objectives, and effective  communication should occur in a broad sense, with information flowing  down, across, and up the organization. In addition to internal  communications, management should ensure there are adequate means  of communicating with, and obtaining information from, external  stakeholders who may have a significant impact on the agency achieving  its goals. The lack of guidance may result in inconsistent application of  CMS’s policy among states with overpayments to some providers and  underpayments to others due to the unavailability of local funding.

section_title: Conclusions
paragraphs: Under broad federal requirements, Medicaid payments are to be made for  Medicaid-covered services delivered to Medicaid beneficiaries and should  be economical and efficient and sufficient to ensure beneficiaries’ access  to care. States are not required to limit their hospital payments to  hospitals’ costs, and we have previously found that CMS lacks criteria to  determine when payments to individual providers, such as hospitals, are  economical and efficient. This review illustrates further concerns with  CMS oversight, as states have made extremely large supplemental  payments that resulted in total Medicaid payments well in excess of  Medicaid costs and allowed for significant hospital spending on  equipment, construction projects, and services not directly related to  Medicaid. This can be partly attributed to the fact that CMS has not  issued guidance to clearly articulate its policy for states on how they  should be distributing supplemental payments or that payments should  not be contingent on the availability of financing for the nonfederal share.  As a result, CMS cannot ensure that states’ payments are based on the  provision of Medicaid services or for demonstration purposes, and not  based on the availability of provider and local government financing.

Lacking guidance from CMS, states have distributed supplemental  payments to hospitals based on the availability of hospital and local  government contributions and, in some cases, have reduced or not made  payments to providers that were unable to provide the expected  nonfederal share. The absence of CMS guidance around how to  distribute Medicaid supplemental payments may be leading to  inconsistent application among states and the distribution of supplemental  payments that are counter to agency policies, resulting in some providers  for which local financing was provided being overpaid while others for  which local financing was not available being underpaid relative to the  Medicaid services they provide.

section_title: Recommendations for Executive Action
paragraphs: To promote consistency in the distribution of supplemental payments  among states and with CMS policy, we recommend that the Administrator  of CMS take the following two actions:  (1)  issue written guidance clarifying its policy that requires a link  between the distribution of supplemental payments and the  provision of Medicaid-covered services, and  (2)  issue written guidance clarifying its policy that payments should  not be made contingent on the availability of local funding.

section_title: Agency Comments
paragraphs: We received written comments on a draft of this report from HHS, which  are reprinted in appendix I. In its comments, HHS concurred with the first  recommendation and agreed with our concerns regarding the second  recommendation.

HHS concurred with our recommendation to clarify in written guidance the  agency’s current policy that supplemental payments support the provision  of services to Medicaid and low-income uninsured individuals. HHS cited  the rule it plans to propose in the spring of 2016 that would set forth  additional requirements to ensure that supplemental payments are  consistent with the statutory principles of economy, efficiency, and quality  of care. HHS also noted that it has begun an effort to apply its  demonstration supplemental payment policy principles to the approval of  demonstrations that contain such payments for uncompensated care,  which it has communicated to Florida and other affected states. CMS did  not comment that it planned to more broadly communicate guidance  regarding its policy to all states.

In responding to the second recommendation, HHS agreed that the issue  of Medicaid supplemental payments being contingent on the availability of  local funding is a concern. HHS also referenced its plans to issue a  proposed rule in spring of 2016 and indicated that the rule will highlight  the issue. Although HHS did not explicitly concur with the  recommendation, HHS did state it is considering additional options to  address the issue.

We encourage HHS, in light of our report findings and recommendations,  to issue explicit guidance on these two issues.

HHS also provided technical comments, which we incorporated as  appropriate.

As agreed with your offices, unless you publicly announce the contents of  the 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 and other interested parties. In  addition, the report is available at no charge on the GAO website at  http://www.gao.gov.

If you or your staffs 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 the report. GAO staff who made key contributions to this report  are listed in appendix II.

section_title: Appendix I: Comments from the Department of Health and Human Services

section_title: Appendix II: 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;  Christine Davis; Iola D’Souza; Sandra George; Laurie Pachter; Ashley  Nurhussein; and Perry Parsons made key contributions to this report.

section_title: Related GAO Products
paragraphs: Medicaid Demonstrations: Approval Criteria and Documentation Need to  Show How Spending Furthers Medicaid Objectives. GAO-15-239.  Washington, D.C.: April 13, 2015.

Medicaid: CMS Oversight of Provider Payments is Hampered by Limited  Data and Unclear Policy. GAO-15-322. Washington, D.C.: April 10, 2015.

Medicaid Financing: States Increased Reliance on Funds from Health  Care Providers and Local Governments Warrants Improved CMS Data  Collection. GAO-14-627. Washington, D.C.: July 29, 2014.

Medicaid Demonstration Waivers: Approval Process Raises Cost  Concerns and Lacks Transparency. GAO-13-348. Washington, D.C.:  June 25, 2013.

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 Made Multiple Program Changes, and Beneficiaries  Generally Reported Access Comparable to Private Insurance.   GAO-13-55. Washington, D.C.: November 15, 2012.

Medicaid: States Reported Billions More in Supplemental Payments in  Recent Years. GAO-12-694. Washington, D.C.: July 20, 2012.

Opportunities to Reduce Potential Duplication in Government Programs,  Save Tax Dollars, and Enhance Revenue. GAO-11-318SP. Washington,  D.C.: March 1, 2011.

High-Risk Series: An Update. GAO-11-278. Washington, D.C.: February  2011.

Medicaid: Ongoing Federal Oversight of Payments to Offset  Uncompensated Hospital Care Costs Is Warranted. GAO-10-69.  Washington, D.C.: November 20, 2009.

Medicaid: CMS Needs More Information on the Billions of Dollars Spent  on Supplemental Payments. GAO-08-614. Washington, D.C.: May 30,  2008.

Medicaid Financing: Long-standing Concerns about Inappropriate State  Arrangements Support Need for Improved Federal Oversight.   GAO-08-650T. Washington, D.C.: April 3, 2008.

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.

Medicaid: Improved Federal Oversight of State Financing Schemes is  Needed. GAO-04-228. Washington, D.C.: February 13, 2004.


Question-summary annotations: questions: question: What were hospitals under GAO review subject to?
answer: Hospitals in two selected states that GAO reviewed that were approved to make supplemental payments under Medicaid demonstrations were subject to certain tracking requirements to ensure payment revenues were used for approved demonstration purposes.
child_questions: question: What did the approved purposes include?
answer: Documentation for one state showed that approved uses of revenues included hospitals' uncompensated costs of serving underinsured or uninsured individuals and operating poison control centers. In the other state, which moved during the study timeframe from making supplemental payments under a traditional Medicaid program to under a demonstration, payments were allowed for purposes such as incentivizing health care delivery system improvements and for uncompensated costs for physician and clinic services, and drugs.

questions: question: What did GAO find about Medicaid payment surpluses?
answer: In 2012, GAO reported that 505 hospitals received Medicaid payments that resulted in Medicaid payment surpluses—that is, payments that exceeded the costs of providing services—of about $2.7 billion.
child_questions: question: Why did these surpluses occur?
answer: These surpluses were due in part to the lump-sum supplemental payments hospitals received that were above their regular payments for individual services.

question: Under what policy did states make these surpluses?
answer: States made them under broad Medicaid payment authorities that allow federal matching on payments up to an upper payment limit or under Medicaid demonstrations. These types of supplemental payments are authorized, but not required, by law.

questions: question: What was GAO asked to examine?
answer: GAO was asked to examine how hospitals used revenues from large supplemental payments and the states' basis for distributing the payments.
child_questions: question: In the selected states, what did GAO review?
answer: For four selected states making large payments and 12 hospitals receiving them, GAO examined (1) how these hospitals used revenues from the payments and (2) the basis on which the states distributed the payments.

question: In the making of this report, what information did GAO obtain and review?
answer: GAO reviewed documents authorizing payments and interviewed hospital, state and federal officials. GAO also obtained payment data for 2009, the year hospitals were identified as having large payments, and for 2012, the most recent year available.