Medicaid Financing: States' Use of Contingency-Fee Consultants to Maximize Federal Reimbursements Highlights Need for Improved Federal Oversight
Released: 2005-06-28T00:00:00

Letter

Background

Title XIX of the Social Security Act authorizes federal funding to states for Medicaid. States have considerable flexibility in designing and operating their Medicaid programs, but they must comply with federal requirements specified in Medicaid statute and regulations. Each state operates its program under a plan that CMS must approve for compliance with current law and regulations. CMS must also approve any amendments to a state’s plan.

Consultants can provide a wide range of services to states, including serving state Medicaid programs. States that lack sufficient in-house resources can turn to consultants to add staff or needed expertise. Contingency-fee consultants are particularly attractive to budget- constrained states because the states do not need to pay them up front, agreeing to pay instead a percentage of any additional amounts saved or collected (the contingency fee). Consultants may also cost states less than developing in-house expertise, as states can hire them for short-term or specific projects rather than commit full-time state personnel. Consultants can also be attractive because they do not generally count against agency staffing ceilings. Regarding Medicaid, consultants can help states by performing services such as: analyzing federal and state statutory and regulatory provisions, developing or revising state Medicaid policies and procedures for consistency with federal requirements, assisting states in developing state plan amendments for federal approval, assisting states in determining payment rates for providers, developing cost allocation plans to support claims for administrative expenditures, training state and local staff in procedures and documentation for submitting claims for federal Medicaid reimbursement, preparing state claims for federal Medicaid reimbursement, and identifying new methods or projects to maximize federal Medicaid reimbursements.

The typical Medicaid payment process is illustrated in figure 1. When a Medicaid beneficiary receives care from a health care provider such as a hospital, physician, or nursing home, the provider bills the state Medicaid program for its services. The state in turn pays the provider from a combination of state funds and federal funds, which have been advanced by CMS each quarter. The state then files an expenditure report, in which it claims the federal share of the Medicaid expenditure as reimbursement for its payment to providers and reconciles its total expenditures with the federal advance. In addition to reimbursement for medical services, the state may claim federal reimbursement for functions it performs to administer its Medicaid program, such as enrolling new beneficiaries; reviewing the appropriateness of providers’ claims; and collecting payments from third parties, that is, payers other than Medicaid, such as Medicare, that may be liable for some or all of a particular health claim.

Transaction 1: A Medicaid beneficiary receives care from a health care provider, such as a physician; the provider bills the state Medicaid program; and the state pays the provider by drawing on a pool of state funds combined with a quarterly advance on federal matching funds.

Transaction 2: The state files an expenditure report, in which it claims the federal Medicaid matching share as reimbursement for its payments to providers and reconciles total quarterly expenditures with the federal advance. States may file claims for medical services and for administrative functions.

States’ claims for federal Medicaid reimbursement—including claims prepared by or under arrangements developed by consultants—must comply with a number of federal statutes and regulations. For example, the Social Security Act requires that states provide methods to ensure that Medicaid payments are consistent with efficiency, economy, and quality of care. CMS policy further clarifies and delineates requirements with which each state must comply in administering its Medicaid program. CMS policy, for example, generally prohibits states from claiming federal matching funds on contingency-fee payments, including contingency-fee payments among state agencies. Each state must also comply with cost principles and procedures, such as preparing a cost allocation plan to justify its administrative claims, as established in Office of Management and Budget (OMB) Circular A-87.

CMS has an important role in ensuring that state claims comply with Medicaid requirements. Within CMS, the Center for Medicaid and State Operations is responsible for approving state Medicaid plans and plan amendments, working with the states on program integrity and other program administration functions and overseeing state financial management and internal control processes. The Center for Medicaid and State Operations shares Medicaid program administration and financial management responsibilities with the 10 CMS regional offices. Traditional financial management analysts in each regional office, numbering about 65 nationwide in fiscal year 2005 according to CMS officials, are responsible for reviewing states’ Medicaid claims to determine if expenditures are complete, properly supported by the state’s accounting records, claimed at the appropriate federal matching rates, and allowable in accordance with Medicaid law and policy. In addition to CMS, external organizations such as HHS OIG and state auditors routinely conduct program and financial audits of state Medicaid programs.

In examining the appropriateness of state Medicaid agency claims for health services provided by local school districts, we have reported concerns about the role of consultants who were paid on a contingency- fee basis to maximize federal Medicaid reimbursements. In particular, in June 1999, we testified on the need for federal and state oversight of growing Medicaid reimbursements to states for Medicaid outreach and other administrative activities provided in schools. We found that school districts had often contracted with consulting firms to perform claims development and reporting activities and that they paid these firms fees ranging from 3 to 25 percent of the total amount of the federal Medicaid reimbursement for the schools’ administrative costs. We found that poor guidance and insufficient CMS oversight permitted questionable billing practices by states and created an environment of opportunism in which inappropriate claims could generate excessive federal Medicaid outlays. Our subsequent report in April 2000 on school-based health services discussed similar concerns with growing outlays and insufficient CMS guidance and oversight to prevent improper reimbursements. Since our 2000 report, CMS has clarified guidance on submitting claims for school- based administrative activities, applying stricter standards and heightening review of the methods states use to identify administrative claims for school-based services. CMS also disallowed more than $278 million in inappropriate claims from one state.

Most States Have Employed Contingency-Fee Consultants in a Wide Range of Reimbursement- Maximizing Projects

An increasing number of states are using consultants on a contingency-fee basis to maximize their federal Medicaid reimbursements through a variety of projects, according to CMS. Contingency-fee consultants in the two states we reviewed—Georgia and Massachusetts—have developed reimbursement-maximizing projects in each of the five categories of claims that we reviewed, generating more than $2 billion during state fiscal years 2000 through 2004 in additional federal Medicaid reimbursements, mainly in Georgia.

CMS Surveys Found Increasing Use of Contingency-Fee Consultants for Reimbursement- Maximizing Projects

CMS surveyed its regional offices in fiscal years 2002 and 2004 and found that an increasing number of states were using consultants on a contingency-fee basis for projects to maximize federal reimbursements. In late 2001, CMS discovered that, contrary to CMS policy prohibiting federal reimbursement for contingency fees in most instances, at least two states (New Jersey and Virginia) had inappropriately claimed federal reimbursements for such fees. Subsequently, CMS surveyed its regional offices to identify which states were using contingency-fee consultants and for which services. This first survey (spring 2002) showed that 10 states were known by regional staff to be using contingency-fee consultants for reimbursement-maximizing projects. In response, CMS issued two letters, in May 2002 and in November 2002, reminding regional offices and states that although states were allowed to employ contingency-fee consultants, the contingency fees themselves were not eligible for federal reimbursement except in certain cases.

In June 2004, CMS again surveyed its regional offices to determine how many states had entered into contingency-fee contracts with private consulting firms to maximize federal reimbursements over the period from January 1999 through June 2004. This survey identified 34 states involved in contingency-fee contracts to help them maximize federal Medicaid reimbursements in a variety of categories. Most frequent were claims for services provided to Medicaid-eligible children in schools, a category in which contingency-fee consultants have assisted states for years. CMS regional offices also reported that 11 states had contracts using contingency-fee consultants in multiple areas, some having projects in as many as four different categories (see table 2).

Our review focused on five categories of claims that we considered at high risk of improper payments: TCM services, services for mental or physical rehabilitation, supplemental payment arrangements, school-based services, and administrative costs (see table 3). For most of these categories, CMS expenditure data show that federal reimbursement of states’ claims in recent years has grown nationwide, sometimes substantially. Although CMS’s 2004 survey gathered information on states’ use of contingency-fee consultants, it would not have captured states’ arrangements established outside the survey period. We identified one consultant, for example, who helped two states develop upper payment limit (UPL) arrangements, although CMS’s 2004 survey did not capture these particular states’ contracts. CMS does not identify the extent to which states’ Medicaid claims stem from projects using contingency-fee consultants to maximize federal reimbursements.

Georgia and Massachusetts Have Extensively Used Contingency-Fee Consultants

From state fiscal years 2000 through 2004, Georgia used a private consulting firm on a contingency-fee basis for multiple reimbursement- maximizing projects, including projects in the five Medicaid claims categories that we reviewed. The consultant provided numerous services on more than 20 projects, such as creating new methodologies for developing claims for federal reimbursement, obtaining legal advice to support reimbursement-maximizing claims, and pursuing retroactive reimbursement for claims that were not previously reimbursed. The consultant also helped the state to write state plan amendments and cost allocation plans. For example, for five UPL projects, the consultant developed the formulas for calculating the state’s UPL, drafted the state plan amendment to submit to CMS, and drafted provider agreements to implement the project. For a project in rehabilitation services, the consultant developed a new methodology for developing claims for federal reimbursement of payments the state made to providers. For TCM projects involving two state agencies, the consultant developed revisions to the state’s payment rate; drafted the state plan amendment to implement the revised rates; drafted revisions to state policy manuals; and conducted training sessions with case managers, including identifying services that could be considered as TCM and explaining how to format their case notes to support Medicaid claims.

Georgia paid the consultant mainly from additional federal Medicaid reimbursements generated from the contingency-fee projects, although CMS determined that the state did not claim federal reimbursement for the contingency fees themselves. Initially, in 1999, Georgia and the consultant agreed on a contingency fee based on additional federal reimbursement generated by the consultant’s projects. For state fiscal years 2000 through 2004, the state paid its consultant more than $82 million in contingency fees. After UPL projects generated for Georgia more than $1.2 billion in additional federal Medicaid reimbursements for state fiscal years 2001 through 2003, and a dispute developed between the state and the consultant about the extent to which the additional reimbursements were attributable to the consultant’s project, the state and the consultant agreed upon an additional $28 million in fees to be paid over 2 years. In total, the UPL arrangement and other consultant projects generated an estimated $1.5 billion in additional federal Medicaid reimbursements for Georgia over approximately 5 years.

Massachusetts has pursued Medicaid reimbursement-maximizing and cost- avoidance projects using contingency-fee consultants since the early 1990s. The state has used various private consulting firms, but since state fiscal year 2000, it has relied primarily on a component of the University of Massachusetts Medical School (UMMS) to conduct reimbursement- maximizing and cost-avoidance projects, including projects in rehabilitation services, supplemental payments, and school-based services. UMMS has performed a number of services to implement these reimbursement-maximizing projects, including assisting in drafting state plan amendments and preparing Medicaid claims for reimbursement.

In addition to reimbursement-maximizing projects, Massachusetts’s state Medicaid agency also obtains other services from UMMS through interagency agreements to help operate its Medicaid program. UMMS performs many of the state’s Medicaid administrative functions, such as analyzing claims to identify and recover improper payments paid to health providers and training state and local staff on procedures for submitting claims.

UMMS was compensated in two ways for its services: (1) for selected projects, UMMS was paid a contingency fee that came from the additional federal funds received by the state for the particular reimbursement- maximizing or cost-avoidance project; and (2) the state paid UMMS from the federal reimbursement for its administrative costs. Contingency fees paid to UMMS varied by project, generally from 1 to 15 percent of additional federal reimbursement generated or costs avoided. Administrative costs that were attributable to UMMS were paid by the state on the basis of UMMS’s reported Medicaid-related costs, according to UMMS officials. Each quarter, UMMS reported its Medicaid-related costs to the state Medicaid agency, which in turn included these costs on the state’s quarterly expenditure report to CMS. The state then reimbursed UMMS for its reported Medicaid-related administrative costs. We could not isolate the amount that UMMS received for administrative costs associated with federal Medicaid reimbursement-maximizing projects because these costs were combined with those for other Medicaid projects, such as pharmacy management and utilization review, which UMMS also conducts for the Medicaid agency. For all its Medicaid administrative activities, UMMS in state fiscal year 2004 claimed approximately $60 million (excluding contingency fees) in state and federal Medicaid reimbursements.

Massachusetts has used other contingency-fee consultants for reimbursement-maximizing and cost-avoidance projects, including a private consultant that developed a TCM project and rate-setting proposal for the state’s Department of Youth Services, among others. That private consultant still served in state fiscal year 2004 as a consultant paid on a contingency-fee basis, helping state agencies with various reimbursement- maximizing projects. For state fiscal year 2004, Massachusetts paid the private consultant about $4 million in fees from contingency-fee agreements for generating nearly $106 million in savings and additional federal reimbursements.

According to the Massachusetts Medicaid agency, the state paid more than $57.5 million to contingency-fee consultants during state fiscal years 2000 through 2004 for projects that generated almost $1.3 billion in funds for the state through all types of reimbursement-maximizing and cost-avoidance projects. Some of these projects would have accrued savings to Medicaid in which the federal government would have shared, such as program integrity efforts to ensure appropriate payments to individual providers. Most of the contingency fees (about $37 million) were paid to UMMS; other (private) consultants were paid about $20.5 million. From state fiscal years 2000 through 2004, reimbursement-maximizing projects generated about $570 million in additional federal reimbursements for the state, for which Massachusetts paid consultants nearly $11 million in contingency fees. UMMS projects accounted for $540 million of the total, for which it was paid $9 million in contingency fees.

Claims from Contingency-Fee Projects Are Not Always Consistent with Law or Current Policy and Can Undermine Medicaid’s Fiscal Integrity

We and others have identified claims from contingency-fee consultant projects that appeared to be inconsistent with current CMS policy and claims that were inconsistent with federal law. We also identified claims from projects that undermined Medicaid’s fiscal integrity. Such projects and resulting problematic claims arose in each of the five categories of claims that we reviewed, either in Georgia or Massachusetts or both. During our work we observed two factors that appeared to increase the risk of problematic claims. One factor involved federal requirements that were inconsistently applied, evolving, or not specific; the second involved Medicaid payments to government units, which can facilitate the inappropriate shifting of state costs to the federal government.

Contingency-Fee Projects in Selected States Resulted in Problematic Federal Reimbursements in Five Categories of Claims

In the five categories of Medicaid services we reviewed, we identified claims that were problematic in Georgia, Massachusetts, or both. We identified claims for TCM services that appear to be inconsistent with current CMS policy and claims for rehabilitation services that were inconsistent with federal law. In other areas, such as supplemental payments, we found claims associated with projects that undermined the fiscal integrity of the Medicaid program and the federal-state partnership. In addition to our work in Massachusetts and Georgia, we identified several reports by HHS OIG about other states, which raise issues about the appropriateness of claims stemming from contingency-fee contracts for school-based services and for administrative costs.

Targeted Case Management Services

Most of the claims for federal reimbursement of Medicaid TCM services in Georgia and Massachusetts that we reviewed appeared to be inconsistent with current CMS policy, which does not allow federal reimbursement for TCM services that are integral to other state programs. Under previously CMS-approved state plans, consultants helped Georgia and Massachusetts increase federal TCM reimbursements. In Georgia, the consultant assisted the state in increasing federal reimbursement for TCM services provided by two state agencies: the Department of Juvenile Justice and the Division of Family and Children’s Services. The consultant assisted Georgia by streamlining the billing process, drafting a state plan amendment proposal, and increasing the number of Medicaid beneficiaries for whom these two non-Medicaid state agencies billed case management services, thus reducing costs to the state for operating these agencies. In Massachusetts, contingency-fee consultants helped the state increase federal reimbursement for TCM services provided by three state agencies: the Departments of Social Services, Youth Services, and Mental Health. The consultants helped develop state plan amendments that established Medicaid coverage for the agencies’ case management services and assisted with developing and updating the rates Medicaid would pay providers for TCM services.

In analyzing the TCM projects and the basis for TCM claims, we found that Georgia and Massachusetts were claiming federal reimbursement, under their CMS-approved state plan amendments, for TCM services that appeared to be unallowable under CMS’s current TCM policy. Specifically, the claims were for services that appeared to be integral components of non-Medicaid programs in these states. The states’ laws, regulations, or policies called for case management services in these programs, and the case management services were provided to all Medicaid- and non- Medicaid-eligible individuals served by the programs. For example, all children served by Massachusetts’s and Georgia’s child welfare agencies receive a broad range of services to promote their welfare and protect them from abuse and neglect. To fulfill this responsibility, state employees provide case management services, refer the children to others for services, and monitor their well-being and progress. CMS has denied TCM claims for similar programs in other states. In fiscal year 2002, for example, CMS denied a state plan amendment proposal to cover TCM services in Illinois, and in fiscal year 2004 it found TCM claims in Texas unallowable, in part because the TCM services claimed for reimbursement were considered integral to other state programs. As in Georgia and Massachusetts, the TCM services in Illinois were for children served by the state’s juvenile justice system. In Texas, such children were served by the state’s child welfare and foster care system.

In Georgia in fiscal year 2003, the state received an estimated $17 million in federal reimbursements for TCM claims from the Department of Juvenile Justice and the Division of Family and Children’s Services, of which about $12 million was for services that appeared to be integral to non-Medicaid programs. In Massachusetts in fiscal year 2004, the state received an estimated $68 million in federal reimbursements generated by claims from the Departments of Social Services, Youth Services, and Mental Health—the agencies whose TCM projects were developed by consultants—for services that appeared to be integral to non-Medicaid programs. CMS officials agreed with our assessment that the claims for TCM services in these two states were problematic, and CMS officials noted that they had been aware of the potential problems in Massachusetts for some time before our review. CMS officials stated that, under an interagency agreement with HHS OIG, HHS OIG had initiated an audit of Massachusetts’s TCM claims in December 2003. At the time of our review, HHS OIG’s findings had not been released.

Rehabilitation Services

Our review of projects involving rehabilitation services found claims that were inconsistent with federal law from a project in Georgia and potentially duplicated claims for rehabilitation services in Massachusetts. Georgia’s contingency-fee consultant helped the state develop a project to increase the rates paid by Georgia’s Medicaid program to two state agencies for rehabilitation services, which in effect allowed the state to overpay these agencies for one set of services while reducing the agencies’ costs for other, non-Medicaid services. In Massachusetts, a consultant helped two state agencies increase claims for rehabilitation services, potentially duplicating other federal Medicaid reimbursements obtained by the state.

In Georgia, the Department of Juvenile Justice and the Division of Family and Children’s Services place certain children in state custody in private residential care facilities throughout the state. Under contract with these state agencies, the residential facilities provide various services, including many not covered by Medicaid, such as room and board, general supervision, and educational services. The facilities also provide rehabilitative counseling and therapy services. The facilities receive a per diem payment from the state agencies for providing all of these services. The Department of Juvenile Justice and Division of Family and Children’s Services then bill the state Medicaid agency for mental health rehabilitation services, one component of the services the agencies pay the private facilities to provide.

As recommended by its contingency-fee consultant, Georgia increased the rates at which the state’s Medicaid agency paid the Department of Juvenile Justice and the Division of Family and Children’s Services for these rehabilitation services. The per diem amount these agencies paid the private facilities, however, stayed the same. Specifically, the consultant recommended that the two state agencies claim Medicaid reimbursement on the basis of the facilities’ estimated costs for rehabilitation services, rather than on the state agencies’ actual per diem payment. Before the project, the state agencies sought Medicaid reimbursement for that portion of the per diem payment attributable to the facilities’ estimated cost for providing rehabilitation services. As a result of the change, the state was able to shift costs it had previously covered to Medicaid. For example, for one category of children, the percentage of the state’s per diem paid by Medicaid increased from 50 percent under the state’s prior method to 87 percent under the new method, while the share of the per diem paid by state funds decreased from 29 percent to less than 1 percent. In some cases, the added reimbursement from the Medicaid agency covered the other state agencies’ own shares of the per diem payments to the facilities—shares that covered the costs of services other than rehabilitation. For example, the portion billed to Medicaid of one agency’s per diem payment to one facility increased from $115 to $162 while that agency’s own share decreased from $37 to $0. In all, this project increased the federal Medicaid reimbursement to the state agencies by $58 million during state fiscal years 2001 through 2003.

The change in the basis for the expenditures that were claimed for Medicaid reimbursement resulted in payments from Georgia’s Medicaid agency to the Department of Juvenile Justice and the Division of Family and Children’s Services for services provided by private facilities that in some cases were higher than what the agencies paid the facilities for all contracted services combined (Medicaid- and non-Medicaid-covered). Specifically, for 82 facilities (about 43 percent of the residential facilities), the amount the state Medicaid agency reimbursed the Department of Juvenile Justice and the Division of Family and Children’s Services in state fiscal year 2004 exceeded the total amount these agencies actually paid the facilities for all services, not just rehabilitation services. One facility, for example, was paid by the Division of Family and Children’s Services $37 per day per eligible child for all services covered by the per diem payment, but the state agency billed the Medicaid program $62 per day for rehabilitation services alone.

CMS officials agreed with our conclusion that the claims from this contingency-fee project were inconsistent with federal law. Specifically, the arrangement was not in accord with the statutory requirement that payments be consistent with efficiency, economy, and quality of care. Further, federal Medicaid funds are intended for Medicaid-covered services for eligible individuals on whose behalf payments are made, not to subsidize non-Medicaid-covered services. In discussing Georgia’s reimbursement-maximizing project, CMS officials also identified a number of additional concerns, including whether the billing agencies, as well as the facilities they paid, were qualified Medicaid providers; whether the facilities’ estimates of Medicaid costs were appropriate; and whether all services included in the facilities’ estimates were Medicaid-covered services. After we brought it to the agency’s attention, CMS initiated a review of this contingency-fee project and the allowability of associated claims for federal Medicaid reimbursement.

In Massachusetts, a contingency-fee consultant helped two state agencies increase claims for rehabilitation services that potentially duplicated federal payments the state had already received because, according to CMS officials, the services were to be paid for under the state’s managed care agreement. The consultant developed and implemented a project in which the state’s Department of Youth Services (the state’s juvenile justice agency), for example, started billing Medicaid for rehabilitation services that the state agency was responsible for providing directly to youth it served. As with Georgia’s arrangement, the Department of Youth Services billed Medicaid for payments the agency made to private facilities that cared for youths in the state’s juvenile justice system. To the extent that the youth served by the department were enrolled in the state’s Medicaid managed care program, these payments may have duplicated payments the state had already received for rehabilitation services provided under that program. States typically accept a fixed federal payment per person per month for providing a range of services to Medicaid beneficiaries enrolled in managed care programs. Rehabilitation services are covered by the managed care payment Massachusetts receives. CMS officials agreed that it was likely that duplicate payments occurred, because a significant portion of the state’s Medicaid beneficiaries are enrolled in its managed care program. CMS officials could not, however, estimate the amount of duplicate payments.

Supplemental Payments

Consultants in both Georgia and Massachusetts helped the states implement supplemental payment arrangements that claimed federal reimbursements on behalf of state and local-government facilities, which did not retain the bulk of the Medicaid payments. Although, under current law and CMS policy, states are allowed to claim federal reimbursements for supplemental payments they make to providers up to UPL ceilings, we have earlier reported that payments in excess of a provider’s costs that are not retained by the provider as payment for services actually provided are inconsistent with Medicaid’s federal-state partnership and fiscal integrity. These payments can be illusory: that is, the state can benefit from the arrangements by appearing to pay the providers more than they ultimately retain while the state seeks federal reimbursement on the excess payment. Most of the additional federal Medicaid funding generated by Georgia’s reimbursement-maximizing projects—$1.2 billion during state fiscal years 2001 through 2003—came through UPL financing arrangements developed by the state’s consultant. The consultant developed five arrangements— one each for local-government-operated inpatient hospitals, outpatient hospitals, and nursing homes and state-owned hospitals and nursing homes. During state fiscal years 2001 through 2003, the state made supplemental payments totaling $2.0 billion to nursing homes and hospitals operated by local governments (see fig. 2). A sizable share of the $2.0 billion, however, was illusory. In reality, the health facilities netted $357 million because they had transferred $1.7 billion to the state Medicaid agency through a process known as an intergovernmental transfer. The state combined this $1.7 billion with $1.2 billion in federal funds that had been advanced to the state through the quarterly advance process. The advanced amount represented the estimated federal share of the planned supplemental payments to local-government facilities of $2.0 billion. The state thus had a funding pool of $2.9 billion at its disposal. From this pool, the state made the $2.0 billion in supplemental payments to local- government providers and retained $844 million to offset its Medicaid expenditures.

Despite actions taken by Congress and CMS to narrow loopholes associated with UPL financing schemes, federal reimbursements for provider payments made up to the UPL are still allowed under federal law and CMS policy. Georgia’s arrangement illustrates how current law and UPL policy continue to allow states to inappropriately generate excessive federal matching payments beyond standard Medicaid payments for services.

Georgia’s consultant also developed a UPL arrangement with state-owned hospitals. During state fiscal years 2001 through 2003, the state made $108 million in UPL payments to state hospitals, which included $64 million in federal funds. The bulk of the payment, however, was illusory, in that the hospitals’ net increase in payments was $22 million. Through this arrangement, the state Medicaid agency was able to retain $42 million in additional funds, which it used to offset its Medicaid expenditures. In commenting on a draft of this report, the state said that it had agreed with CMS to end the aspects of its UPL arrangement that resulted in federal reimbursements exceeding the state’s actual payment to the providers, effective June 30, 2005.

Massachusetts’s consultant similarly assisted the state with increasing federal reimbursements through a UPL arrangement. Under a May 2003 agreement between UMMS and the Massachusetts Medicaid agency, UMMS developed a UPL project involving government-owned or government-operated nursing facilities, which entailed illusory payments to providers. As in Georgia, Massachusetts’s payments, which involved intergovernmental transfers, were illusory because the state claimed federal matching for a UPL payment of $8.6 million when the net payment increase to the nursing homes was $1.2 million. According to the state comptroller’s office, the Medicaid agency had in August 2003 paid UMMS about $155,000 for the project, a contingency fee of 5 percent of the $3.1 million in additional federal Medicaid reimbursements that the project had generated for the state. As with Georgia, the state Medicaid agency agreed in August 2004 to end certain aspects of its UPL arrangement effective June 30, 2005.

Massachusetts contracted with UMMS to implement two other types of supplemental payment arrangements (involving disproportionate share hospital payments), which we were unable to fully evaluate for their consistency with federal law and policy. The arrangements are complex, requiring substantial documentation to assess. The information we received from the state raised legal and policy questions, but the state Medicaid agency did not produce the extensive documentation we needed within the time frame of our work. We believe that a separate study of these arrangements would be required to assess their appropriateness. Where appropriate, we have referred information to CMS and HHS OIG about projects within the scope of our work that we were unable to evaluate (see app. I).

School-Based Health Services and Associated Administrative Costs

HHS OIG has identified concerns with states’ school-based claims for Medicaid services in Massachusetts and in several other states that have relied on the work of contingency-fee consultants. (See app. II for a summary of selected HHS OIG reports of states that have used contingency-fee consultants.) In Massachusetts, HHS OIG reported on concerns with the adequacy of state and UMMS monitoring of claims for school-based services to ensure school districts’ compliance with federal and state requirements, estimating that $2.9 million in unallowable Medicaid claims were paid in state fiscal year 2000. HHS OIG found that the state had inappropriately submitted claims for services that were not documented as delivered, provided by unqualified providers, or provided to students who were absent on the dates of the claimed services. According to state officials, after further review, CMS, which reviews HHS OIG recommendations and issues final disallowances, imposed a $1.2 million disallowance. In a separate report on Massachusetts’ claims for administrative costs related to school-based services, HHS OIG found that in state fiscal years 2000 and 2001, the state did not monitor the appropriateness of school districts’ claims that were compiled by UMMS, resulting in at least $5 million in unallowable claims.

In commenting on a draft of this report, Massachusetts officials cited a number of actions taken in response to HHS OIG’s reports. To strengthen oversight of school-based claims, state efforts include enhanced training and technical assistance to school districts, expanded management reporting, new monitoring and auditing systems, and a newly established Director of School-Based Medicaid within the Office of Medicaid.

In the context of documenting Georgia’s contingency-fee project related to school-based claims, we identified a concern with how Georgia was using additional federal reimbursements gained from school-based claims. Georgia’s contingency-fee consultant assisted the state with Medicaid claims for school-based services in a project that generated about $54 million in federal Medicaid reimbursements over the 3 years the consultant was paid and that, on the basis of state data, we estimate continues to generate about $25 million annually. We found that the school districts were not receiving all of the federal Medicaid matching funds that were generated on their behalf—a concern we noted in prior reports on state school-based claims. According to a state official and documents provided by the state, the state retained $3.9 million, or 16 percent, of federal reimbursements that were claimed on behalf of the school districts for state fiscal year 2003, most of which was used to pay its contingency-fee consultant and about $1 million of which was used to cover the salaries and administrative costs of the five state employees who administered school-based claims in Georgia.

Administrative Costs

Our work in Massachusetts and Georgia found that neither state had claimed federal reimbursement for contingency fees they had paid their consultants. In examining Massachusetts’s administrative claims, however, we found that, despite a major reorganization of state agencies beginning in mid-2003, the state did not submit a complete cost allocation plan— which would have provided the basis for its administrative claims— reflecting its new organization until December 2004. As of April 2005, the revised cost allocation plan had not been approved by HHS. We also found that the state may have claimed more in administrative costs related to its contingency-fee projects than may have been warranted. For example, according to the state’s claims for administrative reimbursement for UMMS’s costs, 100 percent of one senior official’s salary was claimed as a Massachusetts Medicaid administrative expense, even though the official had worked on UMMS projects conducted for other states. We also identified an issue related to Georgia’s claims for administrative costs that we were unable to fully evaluate during our work. As discussed in appendix I, we have referred information regarding Georgia’s administrative claims to CMS for further review.

HHS OIG has recently reported on unallowable administrative expenses in states other than Massachusetts related to their use of contingency-fee consultants. In October 2004, for example, HHS OIG reported that Colorado had received about $180,000 in improper federal Medicaid reimbursement because the state had claimed about $359,000 in consultant fees that were contingent upon reimbursements from the federal government for Medicaid family-planning claims. The claims were made from April 2002 through December 2003. Similarly, in November 2004, HHS OIG reported that Virginia had improperly claimed as Medicaid administrative expenditures the contingency fees paid to a consultant for federal reimbursement-maximizing services also related to family-planning services. From October 2001 through April 2003, the state had claimed about $678,000 in unallowable contingency-fee payments made to a consultant, the federal share of which was about $339,000. Both states agreed that they had improperly claimed these fees and submitted corrective adjustments. According to a CMS official, the agency recouped the states’ excessive reimbursements.

In early 2005, CMS acted upon its concerns about states’ Medicaid administrative claims. For example, CMS reported that, in some instances, evidence showed that states had attempted to shift administrative costs associated with other social service programs to Medicaid. The President’s budget proposal for fiscal year 2006 contains an initiative to limit states’ allotments for Medicaid administrative claims.

Two Factors Increase Risk of Problematic Claims

We observed two factors in many reviewed projects that appeared to increase the risk that claims are problematic, that is, inconsistent with federal law or policy, or with Medicaid’s federal-state partnership and fiscal integrity. One factor was that they came under areas of Medicaid claims where federal requirements were inconsistently applied, evolving, or not specific, at times resulting in inconsistent treatment of states by CMS. Despite CMS’s long-standing concern about state financing arrangements for both TCM and supplemental payments, the agency has not issued adequate guidance to clarify expenditures allowable for federal reimbursement. Federal policy for claims in these categories has evolved over time, and the criteria that CMS applies to determine whether claims are allowable have been communicated to states mainly through state- specific state plan amendment reviews or claims disallowances, rather than through guidance or regulation. State officials, HHS OIG auditors, and CMS financial management staff have raised concerns about the lack of, and need for, improved guidance in a number of categories that we reviewed. Some officials said that the lack of clear CMS guidance has allowed states to develop new financial arrangements, or to continue existing ones, that take advantage of gray areas. In line with these concerns, we also found that existing guidance on allowable claims had been inconsistently applied, had evolved over time, or, in the case of rehabilitation services, had not been specified.

Inconsistently applied policy for allowable TCM services: Although CMS began to deny proposed state plan amendments that sought approval for Medicaid coverage of TCM services that were the responsibility of other state agencies in 2002, states with such arrangements then in place, such as Georgia and Massachusetts, were allowed to continue them. For other states, CMS had determined that such arrangements were not eligible for federal Medicaid reimbursement for several reasons: (1) the services were typically integral to existing state programs, (2) the services were provided to beneficiaries at no charge, and (3) beneficiaries’ choice of providers was improperly limited. CMS, however, had approved Georgia’s and Massachusetts’s state plan amendments for TCM services before 2002. Although CMS has since applied these criteria to deny TCM arrangements or claims—for example, in Maryland, Illinois, and Texas—it has not yet sought to address similar, previously approved TCM arrangements that are inconsistent with these criteria. CMS regional officials told us they could not reconsider the TCM claims from two agencies in Georgia and four in Massachusetts because they were waiting for new guidance that the agency was preparing. CMS has been working on new TCM guidance for more than 2 years, according to agency officials, and as of May 2005 this guidance had not been issued. CMS’s fiscal year 2006 budget submission identifies savings that could be achieved by clarifying allowable TCM services, but CMS had not published a specific proposal at the time we completed our work.

Evolving policy for allowable supplemental payment arrangements: For several years, we and others have reported on state financing arrangements that allow states to inappropriately generate federal Medicaid reimbursement without a corresponding state expenditure. While Congress and CMS have taken steps to curb these abuses, states can still develop arrangements enabling them to make illusory payments to gain federal reimbursements for their own purposes. CMS has recognized that states can gain from supplemental, such as UPL, payment arrangements through intergovernmental transfers. Since fiscal year 2003, for example, CMS has worked with individual states to address such arrangements and, under this effort, CMS had identified and made agreements with Georgia and Massachusetts to change how their UPL arrangements operated. At the same time, the agency has not issued guidance stating its policy on acceptable approaches for supplemental payment arrangements, including the allowed methods for funding the state’s share of the Medicaid program. CMS’s budget for fiscal year 2006 proposes to achieve federal Medicaid savings by curbing financing arrangements that have been used by a number of states to inappropriately obtain federal reimbursements. The specific proposal, however, had not been published at the time we completed our review.

Unspecified policy on allowable Medicaid rehabilitation payments to other state agencies: CMS has not issued policy guidance that addresses situations where Medicaid payments are made by a state’s Medicaid agency to other state agencies for rehabilitation services. CMS financial management officials told us that states’ claims for rehabilitation services posed an increasing concern, in part because officials believed that states were inappropriately filing claims for services that were the responsibility of other state programs. CMS does not specify whether claims for the cost of rehabilitation services that are the responsibility of non-Medicaid state agencies are allowable. CMS’s fiscal year 2006 budget submission identifies savings that could be achieved by clarifying appropriate methods for claiming rehabilitation services. CMS had not published a specific proposal at the time we completed our review.

Another factor shared by the reimbursement-maximizing projects we examined was that they increased Medicaid payments from state Medicaid agencies to other state or local-government agencies—that is, to non- Medicaid agencies that may serve Medicaid beneficiaries—a mechanism that can facilitate an inappropriate shift of state costs to the federal government. Medicaid reimbursement to government agencies serving Medicaid beneficiaries is allowable in cases where the claims apply to covered services and the amounts paid are consistent with economy and efficiency. In contrast, the projects and associated claims we reviewed showed that reimbursement-maximizing projects often involved services and circumstances that Medicaid should not pay for—such as illusory payments to government providers.

Limited State and CMS Oversight of Claims from Contingency-Fee Projects Raises Concerns about Medicaid Financial Management

Georgia, Massachusetts, and CMS provided limited oversight of claims associated with projects developed with the aid of contingency-fee consultants to ensure that they were consistent with Medicaid requirements. The two states’ measures to oversee contingency-fee projects were insufficient to prevent inappropriate claims, and CMS officials were not always aware of states’ specific projects to maximize federal reimbursement. Problems we found with CMS’s oversight of states’ reimbursement-maximizing projects and associated claims illustrate the need to address broader financial management issues, especially as more states adopt reimbursement-maximizing strategies without hiring consultants.

States Have Taken Some Steps to Ensure Appropriate Claims, but Problems Remain

Georgia and Massachusetts have taken some steps to oversee the contingency-fee consultants they have engaged for reimbursement- maximizing projects. Georgia’s oversight was conducted primarily through a steering committee, formed by the state in 1999, with project review and approval responsibility. Specifics of implementing the projects were delegated to the state agencies that generated the enhanced reimbursements. In some cases, the state Medicaid agency and the steering committee disapproved proposed projects because they did not comply with Medicaid law or policy. For example, the consultant proposed that two state agencies be allowed to bill for TCM for a particular client in a given month. The state agency determined that this proposal would result in an inappropriate duplicate billing and chose to allow only one state agency to bill for TCM services per client per month. In addition, although Georgia was not required to notify CMS when a new project was developed by the state’s consultant—and generally did not do so because it believed the authority to implement various projects was already included in the state’s existing approved Medicaid plan—on occasion, it sought the advice of CMS’s regional office about a project.

Despite Georgia’s review of the consultant’s proposed projects, however, the state’s oversight did not identify problems with some of the projects we reviewed. For example, Georgia made several changes in its rehabilitation program, including a change in how payment rates to private facilities were calculated. As discussed in the rehabilitation services section of this report, we believe the revised rates were not in accord with requirements that payments be consistent with efficiency and economy. CMS officials—who had not been asked to approve the states’ revised rates—agreed, and during our review began an investigation to determine the extent of the problem.

In Massachusetts, oversight for Medicaid reimbursement-maximizing projects has been shared by the state Medicaid agency, which is now in the Executive Office of Health and Human Services, and the Office of the State Comptroller. The Medicaid agency is responsible for ensuring that the state’s claims for federal reimbursement are consistent with federal requirements. The Comptroller’s office reviews and approves specific reimbursement-maximizing projects proposed by the Medicaid agency, manages the accounts that receive reimbursements generated by the projects, verifies and pays the contingency fees, and reports program results annually to the state legislature. The Comptroller’s review has focused on the financial implications of proposals, more than on program implications. Recent state legislation authorized the Medicaid agency to enter into contingency-fee contracts with UMMS without the Comptroller’s prior approval and to pay contingency fees up to a ceiling of $30 million for state fiscal year 2005.

The Massachusetts Medicaid agency engaged UMMS to perform many ongoing operational functions of its Medicaid program. In February 2004, when the Executive Office of Health and Human Services was designated as the single state Medicaid agency, and staff of the Medicaid and other state agencies were relocated under UMMS, UMMS has assisted the state Medicaid agency in carrying out many of its functions. UMMS in 2004 had major responsibilities for administering significant operational aspects of the Medicaid program, such as conducting program integrity and utilization reviews and compiling the state’s Medicaid claims for school- based services, including ensuring the appropriateness of such claims. At the same time, UMMS has also been paid contingency fees by the state Medicaid agency for numerous reimbursement-maximizing activities, such as those related to school-based claims.

In addition to its agreements with the Massachusetts Medicaid agency to operate portions of the Medicaid program, UMMS also served as a contingency-fee consultant to other Massachusetts entities to enhance federal Medicaid reimbursements. UMMS officials told us that they have contracted on a contingency-fee basis with about 86 of the state’s 356 local school districts to develop their school-based Medicaid administrative claims and with about 75 local districts to develop school-based health services claims. UMMS therefore administers significant operational aspects of the state’s system for school-based Medicaid services, including overseeing the appropriateness of claims, and acts as a contingency-fee consultant to prepare some of those claims for some school districts. In audits of Massachusetts’s claims for school-based health services, HHS OIG cited inadequate oversight by both the state Medicaid agency and UMMS. HHS OIG audited health claims and administrative expenditures from eight school districts and found improper claims in both categories. In our view, this dual role—assisting with Medicaid program administration, including quality control, and consulting with local school districts on a contingency-fee basis—creates an appearance of conflict of interest for UMMS, raising questions about UMMS’s incentives for ensuring that claims for federal Medicaid reimbursement are appropriate.

The oversight measures that Massachusetts Medicaid officials told us they had in place to ensure that reimbursement-maximizing claims compiled by UMMS were consistent with federal requirements were insufficient to prevent inappropriate claims. The officials told us, for example, that they relied on edits in the state’s Medicaid Management Information System— the computer system that processes provider claims for payment—to ensure that the processed Medicaid claims were allowable. According to the CMS financial management officials who reviewed Massachusetts’s claims, however, claims from some reimbursement-maximizing projects were not subject to computer-based edits. The officials estimated that about 30 percent of the state’s Medicaid claims, including some of those for managed care and supplemental payments, are processed off system— that is, not through the state’s computerized Medicaid Management Information System—and these off-system claims pose a greater concern, they told us, because inaccuracies are more common in them.

CMS Has Limited Oversight of Contingency- Fee Projects and Associated Claims

CMS did not routinely review projects in Georgia and Massachusetts that used contingency-fee consultants and in fact was unaware of some of the specific projects to increase federal reimbursements that we reviewed. CMS oversight of such projects and the associated claims was limited because the agency did not routinely request that states indicate on state plan amendments or expenditure reports whether consultants were involved in their development. CMS officials told us they relied primarily on the states to ensure that projects and claims were appropriate. Although CMS surveyed its regional offices in fiscal year 2004 to identify contingency-fee consultant projects by state, our work in Georgia and Massachusetts identified more projects developed with assistance from contingency-fee consultants than CMS’s survey reported. CMS officials told us that they became aware of Georgia’s contract with its consultant when a local newspaper reported a dispute between the state and the consultant. CMS officials overseeing the Massachusetts Medicaid program told us they had not examined the relationships between the Medicaid agency and UMMS, but they told us that during the time of our review they had asked HHS OIG to investigate the appropriateness of the state’s Medicaid administrative claims, which included those attributable to UMMS. HHS OIG’s investigation was under way when we completed our work.

CMS has stated that it lacks authority to require states to disclose contingency-fee arrangements when states are not seeking federal reimbursement for the fees. CMS officials clarified, however, that they can request information about the assistance of a contingency-fee consultant when agency officials are reviewing state submissions such as state plan amendments, cost allocation plans, or expenditure reports. Officials said that they did not routinely request such information in conjunction with these reviews. In Georgia and Massachusetts, we found CMS reviews limited in the extent to which they identified concerns with contingency- fee projects and associated claims in three areas: CMS review of state plan amendments: Because states’ proposals for changes to their state plans through amendments might be general in nature, CMS may not have details to identify the specific changes that would increase claims. Georgia, for example, did not submit a state plan amendment about its project to increase payment rates for rehabilitation services to children in the state’s juvenile justice and child protection systems because it had concluded that it could change how it claimed Medicaid reimbursement without changing the state plan section that authorized the payments. When we discussed this example with CMS officials, they told us that when a state’s plan is broadly written, the state may not always submit amendments to change the plan provisions. The CMS officials told us that even in cases where a contingency-fee consultant was involved in drafting a state plan amendment—for example, to establish new coverage or payment rates—they might not be aware of a consultant’s involvement because states do not routinely disclose this information to CMS.

CMS review of cost allocation plans: As previously discussed, Massachusetts did not submit a complete draft cost allocation plan to CMS, reflecting its major reorganization, until December 2004. As of April 2005, the revised cost allocation plan had not been approved. CMS officials did not explain why Massachusetts was allowed to continue claiming federal Medicaid reimbursement for administrative costs on the basis of an outdated cost allocation plan, other than to say that several other states did not have current plans. Massachusetts’s officials told us they did not expect major changes as a result of the revised cost allocation plan, but the extent of any changes cannot be verified until a revised plan is approved.

CMS review of Medicaid quarterly expenditure reports: Nothing in the quarterly expenditure report indicates when a contingency-fee consultant has assisted in developing specific categories of claims, making it difficult to identify such claims. CMS regional financial analysts responsible for reviewing Massachusetts’s expenditure reports told us that it was standard practice to defer payment to allow further investigation of any claims for new services when they knew that a consultant had been involved. In such cases, they requested and analyzed further information from the state. The ability of CMS regional officials to identify potential problems with states’ claims by analyzing quarterly expenditure reports was limited. Regional CMS officials responsible for Massachusetts told us they used standard trend and variance analyses to review the reports and also conducted some analyses of their own, but they were not confident that these reviews were adequate to identify problems. CMS regional analysts are able to conduct only a few focused reviews each year of potential problems with states’ claims identified through their analyses of the quarterly expenditure reports, and, they told us, random reviews are not feasible.

In the CMS regional offices managing Medicaid claims from Georgia and Massachusetts, available agency resources—especially in terms of experienced analysts relative to the scale and variety of claims—have constrained the conduct of financial reviews. Although Georgia claims federal Medicaid reimbursements totaling approximately $1.7 billion per quarter, CMS has had only one financial analyst assigned to review those claims; for Massachusetts, three CMS analysts are responsible for reviewing quarterly claims of more than $2 billion.

Our work in Georgia and Massachusetts also identified an area where consultants were advising states and where CMS does not have any oversight mechanism. CMS does not review the payment rates that state agencies other than the Medicaid agency bill to the Medicaid program for services such as TCM. In Massachusetts, each of the four non-Medicaid agencies providing TCM services developed its own rate for billing the services to Medicaid, in some cases with the assistance of the agency’s consultant. In state fiscal year 2004, these four agencies billed Medicaid a monthly fee for TCM services that ranged from $178 per person in the Department of Mental Retardation to $454 in the Department of Youth Services, according to state officials. Although CMS approved a general rate-setting provision as part of the original state plan amendments for these agencies’ case management services, the actual payment amounts are generally reviewed and approved only by a division of the Massachusetts Medicaid agency. CMS does not review these state- approved payment amounts, and the HHS Division of Cost Allocation reviews cost allocation plans related only to administrative, not service, claims.

Problems Illustrate Need to Improve the Financial Management of Medicaid

The concerns we identified with the appropriateness of states’ Medicaid claims stemming from contingency-fee projects illustrate the urgent need to address the issues we have identified with CMS’s overall financial management of the Medicaid program. We identified problems with claims in states other than Georgia and Massachusetts that have undertaken reimbursement-maximizing activities, without employing consultants, in categories of long-standing concern, such as supplemental payment arrangements. In March 2004, for example, when one state sought consultants for reimbursement-maximizing services for Medicaid and other programs, the proposed scope of work specifically excluded activities that the state already had under way, including Medicaid UPL claims, school-based administrative and service claims, eligibility for foster children, and TCM services. CMS and HHS OIG officials in the Atlanta regional office told us about reimbursement-maximizing projects in two states in the region that were developed without the use of consultants.

CMS relies on its standard financial management controls to identify or correct any unallowable Medicaid claims that states may submit, including those that might be associated with reimbursement-maximizing contingency-fee projects. In assessing the appropriateness of claims generated from contingency-fee projects in Georgia and Massachusetts, we found other examples of potentially unallowable claims that CMS’s financial management controls had failed to uncover. For example, when we discussed Georgia’s contingency-fee project for rehabilitation services, CMS officials not only agreed with our assessment that the additional reimbursements from the project were inconsistent with federal law, but also identified concerns about whether the state agencies and facilities were qualified providers, cost estimates were appropriate, and all services were covered by Medicaid. Similarly, we identified Medicaid billing concerns in Massachusetts that did not stem from the contingency-fee projects: One state agency—the Department of Mental Retardation, which was not assisted by a contingency-fee consultant—was billing Medicaid for TCM services without appropriate documentation. According to department officials, the agency automatically bills Medicaid a monthly fee of $178 for each Medicaid-eligible beneficiary in its TCM caseload. The department does not verify its billing records with its case managers’ records to ensure that each beneficiary received a covered service each month. Automatic billing for case management services is not allowed under Medicaid: to claim federal reimbursement, states must document a specific service delivered on a specific date. The Department of Mental Retardation received about $19 million in federal reimbursement for its TCM claims in 2004, according to state officials. In commenting on a draft of this report, state officials acknowledged that contacts with clients do not necessarily occur each month and that the Department of Mental Retardation’s billing for TCM was an area for improvement. Officials said that a new management information system planned for state fiscal year 2006 would allow electronic documentation of contacts with clients and automated verification during the billing process.

Three other Massachusetts agencies—the Departments of Social Services, Youth Services, and Mental Health—billed Medicaid for TCM services even though the agencies could have been serving some of the same beneficiaries. A foster child served by the Department of Social Services, for example, could also be a juvenile offender served by the Department of Youth Services. State Medicaid officials permitted each state agency to bill Medicaid for TCM services and told us they did not consider this practice duplicate billing, because they believed the agencies provided different services. The officials told us that the CMS-approved state plan amendments authorizing TCM services for these agencies would show that the services differed. Our review of the documents provided by state officials, however, showed that for two agencies, the TCM service descriptions were identical and for all four agencies, including the Department of Mental Retardation, the service descriptions were similar. State officials acknowledged that overlap in eligibility occurred among the agencies but said they were unaware of the number of Medicaid beneficiaries for whom two or more TCM services were claimed per month or the amount of reimbursements claimed for those beneficiaries. In Georgia, in contrast, only one agency is allowed to bill for TCM services in a given month for a given beneficiary.

CMS lacks clear, consistent policies to guide the states’ and its own financial oversight activities. Furthermore, CMS officials have expressed concerns about the agency’s ability to review states’ activities in all high- risk areas that the agency has identified. We found that CMS has known for some time that two high-risk categories we identified—claims generated from consultants paid on a contingency-fee basis to maximize reimbursements and claims generated from arrangements where state Medicaid programs are paying other state agencies or government providers—were problematic. For example, CMS had listed these two categories on a financial tracking sheet of high-risk areas as of 2000. At an October 2003 congressional hearing, the CMS Administrator expressed concern that the Medicaid program was understaffed and that consultants in the states were “way ahead of” CMS in helping states take advantage of the Medicaid system.

CMS has undertaken several important steps to improve its financial management of the Medicaid program. A major component of the agency’s initiative is hiring, training, and deploying approximately 100 new financial analysts, mainly to regional offices. These analysts will be responsible for identifying state sources of Medicaid funding and contributing to the review of state budget estimates and expenditure reports. As of April 2005, CMS reported that 85 new financial analysts had been hired for the regions, and 10 new analysts were on duty in the central office. According to CMS, the new analysts have received initial training in the central office; two meetings per year are planned to bring all new analysts together for continuing education; and monthly conference calls take place with all new analysts and regional and central office officials. In addition, each region has its own conference call every 2 weeks with officials of CMS’s new Division of Reimbursement and State Financing. This new division, which was created in January 2005 to centralize and coordinate federal oversight of Medicaid reimbursement and financial issues, comprises the two nationwide review teams for state plan amendments and the 10 new central office funding specialists. Expectations for the new division and its analysts are high and their responsibilities broad; it is too soon, however, to assess their overall accomplishments.

Conclusions

Because of its size, complexity, and federal-state structure, the Medicaid program has been subject to waste, abuse, and exploitation. Our work has found that projects developed by consultants who are paid a fee contingent upon additional federal reimbursements that they generate pose a financial risk to the program. It is not possible, however, to quantify the magnitude of this financial risk, because CMS does not routinely request information regarding states’ use of contingency-fee consultants to assist with reimbursement-maximizing projects and associated claims.

Reimbursement-maximizing projects have generated huge reimbursements for states—more than $2 billion in total over a 5-year period for the two states we reviewed. Large reimbursements such as these place heavy responsibility on CMS to monitor the many complex financing arrangements and claims arising from contingency-fee consultants’ reimbursement-maximizing activities. The concerns we have identified with claims from consultants’ projects and concerns with states’ submitting claims that have not been reflected in state plan amendments and cost allocation plans illustrate the urgent need for CMS to address certain issues in its oversight of states’ contingency-fee consultant projects and in its overall financial management. In addition, many of the problematic financing arrangements we examined involved payments to units of state and local government—which states have long used to maximize federal Medicaid funding—suggesting that greater CMS attention is needed to payments among these units, regardless of whether consultants are involved.

For more than a decade, we have reported on the various methods some states have used to inappropriately maximize federal Medicaid reimbursement and have made recommendations to end such schemes. CMS has taken several steps to respond to our recommendations and to address other issues it has identified, including taking steps to hire 100 new financial analysts and developing budget proposals for fiscal year 2006 to clarify policies for allowable claims in several high-risk areas. Nevertheless, specific proposals have not yet been set forth, approved, or implemented. We continue to encourage CMS to take steps to identify and curb opportunistic financing schemes before they become a staple of state financing, and further erode the integrity of the federal-state Medicaid partnership, and to do so in a manner that ensures that policies are clear and consistently applied. With regard to specific projects we examined for this report, we commend CMS and HHS OIG for steps they have taken to examine claims from these projects, including the potential for identifying unallowable claims that may involve recovery of federal funds. In addition, addressing our prior recommendations to Congress and CMS that remain open could also help resolve some of the issues identified in this report.

Because states continue to take advantage of financing schemes relying on payments to units of state and local government, we believe that our earlier recommendation to Congress—to prohibit Medicaid payments to government providers that exceed their costs—is still valid and would help safeguard federal Medicaid funds.

Because states, often with the assistance of consultants, continue to make illusory payments by establishing excessive UPL payment arrangements, we reiterate three earlier recommendations that remain open: that the Administrator of CMS (1) establish uniform guidance for states, setting forth acceptable methods to calculate UPLs; (2) expedite financial management reviews of states with UPL arrangements; and (3) improve state reporting on these arrangements.

States should not be held solely responsible for inappropriately seeking reimbursements where policies have not always been clear or clearly communicated. Although CMS has taken steps in recent years to minimize the federal financial risk involved in inappropriate financing schemes, the agency must also ensure that its policies are clear and consistently applied across states. Otherwise, CMS is at risk of treating states inconsistently and of placing undue burdens on states to comply. Because of the potential for a significant financial impact on states that may have relied on excessive federal funding for certain services, those states found out of compliance with CMS policy may need to be granted a transition period for coming into compliance with clarified CMS requirements.

Recommendations for Executive Action

To improve CMS’s oversight of projects involving contingency-fee consultants and any associated claims for federal Medicaid reimbursements, we recommend that the Administrator of CMS take the following two actions: Routinely request that states disclose their use of contingency-fee consultants when submitting state Medicaid documents, such as state plan amendment proposals, cost allocation proposals, and expenditure reports, and, in the event that states do not voluntarily provide this information, seek legislative authority to require disclosure.

Enhance CMS review of state Medicaid documents for which states have used a contingency-fee consultant and take appropriate action to prevent or recover federal reimbursements associated with unallowable claims.

To strengthen CMS’s overall financial management of state Medicaid activities, we recommend that the Administrator of CMS take the following five actions: Require that states identify—in Medicaid-related documents such as state plan amendments and expenditure reports—arrangements or claims for payments that involve payments to units of state or local government, such as state- and local-government-owned or -operated facilities.

Enhance CMS review of states’ Medicaid documents, such as state plan amendments, cost allocation plans, and expenditure reports, specifically reviewing payments states make to units of government, including the methodology behind payment rates to government units and the basis for any related claims, and take appropriate action to prevent or recover unallowable claims.

Establish or clarify and then communicate CMS policies on TCM, supplemental payment arrangements, rehabilitation services, and Medicaid administrative costs and ensure that the policies are applied consistently across all states.

Ensure that states submit cost allocation plans as required and establish a procedure for their prompt review.

On the basis of the findings of this report regarding specific projects and billing practices, follow up with states’ associated claims and recover federal reimbursements of unallowable claims as appropriate in Georgia and Massachusetts.

Agency and State Comments and Our Evaluation

We provided a draft of this report for comment to CMS, Georgia, and Massachusetts. Each provided written comments, which we summarize and evaluate below.

CMS’s Comments and Our Evaluation

CMS commented that the draft report did not accurately reflect the many activities the agency has taken to address the issues raised in the report and that recommendations in the report have already substantially been met. CMS believes that many of the problems that the draft report highlighted, including those with the projects in the five high-risk categories of claims that we selected to review in Georgia and Massachusetts, were already known to CMS as problematic. For example, CMS said that the five high-risk categories we cited were highlighted in the President’s budget for fiscal year 2006 as areas in need of reform. CMS discussed many steps it had taken in recent years to improve the financial management of Medicaid, which it said were omitted from the report.

Although CMS stated that federal dollars have been supplanting state dollars and that the Medicaid program is unquestionably paying for things it should not pay for, the agency also said it was addressing this problem through work with individual states to reach agreements to ensure use of appropriate financing mechanisms and to end inappropriate ones.

We acknowledge that CMS has taken important actions in recent years to improve the financial management of Medicaid. We believe our draft report recognized these efforts, including CMS’s creation of the central financial review body called the Division of Reimbursement and State Financing, and on the basis of CMS’s comments, we have added further information to the report. We also acknowledge that we selected the two states in our review, Georgia and Massachusetts, because of the wide variety of contingency-fee projects in these states that CMS’s survey had identified, including projects in areas where claims were thought to be at high risk or growing in dollar amounts in recent years. Although CMS suggested that the scope of our work was limited to these two states, we did draw upon our prior work and that of HHS OIG to extend our findings. Moreover, we believe that conducting detailed work in two states helped us identify systemic issues extending well beyond these two states. We further note that we established the scope of our work, including areas we considered to be high risk, before publication in 2005 of the President’s fiscal year 2006 budget that reflected CMS’s initiatives for improving its policy in these same high-risk categories of claims. We believe this nexus of our work and CMS’s stems from our shared objective of protecting Medicaid’s fiscal integrity. At the same time, we also note that we have raised concerns about certain inappropriate financing methods in these high-risk areas for many years, that some prior recommendations remain open, and that problems remain. In addition to the important steps CMS has taken in recent years to improve its policies and oversight, we believe that more can and should be done to better ensure the program is operating as Congress intended—that is, as a shared federal-state partnership providing health care resources for covered services for eligible beneficiaries.

CMS also commented on our specific recommendations, and these comments are summarized, along with our response, below.

Regarding our recommendations for improved agency oversight of states’ use of contingency-fee consultants, CMS stated that it does not have authority to require states to disclose their use of contingency-fee consultants, although it believes it can request such information. Consequently, we have adjusted our recommendation to suggest that CMS routinely request, rather than require, that states disclose such information, and seek legislative authority to require such disclosure if states do not do so. CMS also stated that it recognizes that contingency-fee consultants are a potential risk factor and that it is committed to fully assessing the basis for claims in accordance with all relevant requirements.

Regarding our recommendations that CMS take certain steps to improve its overall financial management of state Medicaid activities, including taking certain steps to improve oversight of states’ claims for payments made to units of government, CMS discussed its initiative started in August 2003. Under this initiative, CMS requests information from states on their financing methods and terminates those that the agency deems are not consistent with the statutory federal-state financial partnership. CMS said that, as of June 10, 2005, 23 states had agreed to terminate one or more financing practices. Although our draft report acknowledged that CMS had undertaken this effort, we have added further information to the report about CMS’s initiative. We maintain, however, that CMS’s current state-by- state approach to reviewing states’ financing methods—by examining them when states submit proposed state plan amendments and obtaining agreement from states to end them—does not ensure that its policies are clear to states or are consistently applied. For example, a state’s financing methods may not be reviewed if the state does not submit a proposed state plan amendment. We maintain our position and associated recommendations that CMS do more to clarify, communicate, and consistently apply its policies regarding areas that both CMS and we have identified as high risk.

Regarding our recommendation that CMS establish or clarify and communicate its policies on TCM, supplemental payment arrangements, rehabilitation services, and Medicaid administrative costs and ensure that the policies are applied consistently across states, CMS responded that the fiscal year 2006 President’s budget proposals would do so. Our draft report acknowledged these proposals but also noted that the specific proposals had not been released as of June 2005. In the absence of concrete proposals and actions to implement them, we believe our recommendation remains valid.

Regarding our recommendation that CMS ensure that states submit cost allocation plans as required, CMS cited existing requirements for states to submit cost allocation plans. CMS’s comments were not fully responsive because our recommendation did not address the need to develop new requirements but to ensure compliance with existing requirements. We therefore maintain this recommendation.

Regarding our recommendation from prior work that Congress prohibit Medicaid payments to government providers that exceed their costs, CMS noted that it included this proposal in the President’s fiscal year 2006 budget. Regarding our prior recommendation that CMS take steps to improve its oversight of states’ UPL arrangements, CMS noted its current state plan amendment review process and its financial management review plan for fiscal year 2005 to review high-risk UPL arrangements as examples of how it has already responded to our prior recommendations. Our draft report described CMS’s proposal, which parallels the recommendation we made to Congress in 1994, and CMS’s initiative. We revised the report to acknowledge CMS’s plans to implement our earlier recommendation to review high-risk UPL arrangements and note that not all specific recommendations have been implemented.

Regarding our discussion in the draft report about our recommendation from prior work that CMS should more effectively and efficiently target oversight resources toward areas most vulnerable to improper payments, CMS strongly disagreed that its current approach is not effective, and it listed numerous actions it has taken since our 2002 report making these recommendations. We agree that CMS has taken numerous actions since 2002. Because we have an ongoing review of CMS’s financial management of Medicaid related to our 2002 report findings, we revised the report to remove references to our earlier recommendations.

See appendix III for CMS’s written comments.

State Comments and Our Evaluation

Georgia and Massachusetts commented on the importance of contingency- fee contracts and states’ use of consultants in helping states secure resources they otherwise would not have. Massachusetts commented that seeking federal resources for people in need when those resources are lawfully available is the fiscally responsible thing for states to do. The state noted that nothing in law prohibits contingency-fee contracts and that in themselves, “contingency-fee contracts do not let states off the hook for determining what is and what is not appropriate under Medicaid.” Georgia commented that the complexity of the Medicaid program can and does compel states to turn to expert consultants for assistance and said that the report inaccurately suggests that states’ use of contingency-fee consulting is somehow illegitimate. We acknowledge that use of contingency-fee contracts is allowed under law and that states can employ consultants for a number of valid Medicaid purposes, and our report has made these points. Our key findings, however, focus on the need to ensure that financing methods and associated claims that stem from contingency- fee projects are consistent with federal law, policy, and the fiscal integrity and federal-state partnership of the Medicaid program. Our work identified concerns with claims from contingency-fee projects that were problematic in these respects.

The two states also commented that the language of the law related to coverage of the categories of claims we reviewed—rehabilitation, targeted case management, Medicaid administration, school-based services, and supplemental payments—is broad or complex, and they suggested that they have made good-faith efforts to comply with ever evolving federal regulations and policy. Both states believe that their claims comply with the law. Regarding claims for payments made above what the state was paying individual facilities for rehabilitation services, Georgia indicated that one specific example we provided was an exceptional case. Nevertheless, when we sought clarification from the state on its comments, the state’s explanation did not address our overall concern about the underlying method for setting Medicaid payment rates. We revised the report to reflect the state’s comments and our continuing concern. Massachusetts noted that little in the way of regulation narrows the broad definitions in federal law of covered services; that the state’s definitions of what Medicaid covers within the categories of claims we reviewed fall within long-standing federal interpretations; and that GAO’s finding the state’s definitions questionable does not make them illegal or improper.

Massachusetts agreed with our conclusion that CMS policy in many of the areas that we reviewed has been unclear, either because it has been inconsistently applied, evolving, or is not specific. At the same time, although most methods and resulting claims we question may not be illegal, we believe they are inconsistent with the program’s federal-state cost-sharing design, fiscal integrity, or with current CMS policy. For example, some methods used by states, in our view, in effect increase the federal share of the Medicaid program beyond what has been established by a formula in law and are therefore inappropriate. In the report, we clarified the basis for our concerns about problematic projects and associated claims we identified.

Georgia’s and Massachusetts’s written comments, and our more detailed responses, appear in appendix IV and appendix V, respectively. State officials also provided us with technical comments, which we have incorporated as appropriate.

As arranged with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days after its issue date. At that time, we will send copies of this report to the Secretary of Health and Human Services, the Administrator of the Centers for Medicare & Medicaid Services, and other interested parties. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov.

If you or your staff members have any questions, please contact me at (202) 512-7118. Another contact and major contributors are included in appendix VI.

Appendix I: Description of Contingency-Fee Projects Referred for Additional Review

This appendix addresses three contingency-fee projects that we included in but could not fully assess during the time frames of our review. On the basis of the information we obtained during our review, we believe that separate studies of these three projects are warranted. We have referred information about these projects to the Centers for Medicare & Medicaid Services (CMS) and Department of Health and Human Services’ (HHS) Office of Inspector General (OIG) for additional review.

In addition to the projects discussed in this report, the University of Massachusetts Medical School (UMMS) helped Massachusetts develop two supplemental payment arrangements to increase federal reimbursements. One project involved supplemental financing known as disproportionate share hospital (DSH) arrangements, and one involved federal Medicaid reimbursement for medical services to inmates of state correctional facilities.

States are required to make DSH payments to hospitals that care for a disproportionate number of low-income patients. By statute, hospitals qualifying for DSH payments are subject to a limit on the amount of supplemental DSH payments they may receive. As with upper payment limit (UPL) arrangements, supplemental payments made to government providers through DSH arrangements can be illusory: that is, the state can benefit from the arrangements by appearing to pay the providers more than they ultimately retain and seeking federal reimbursement on the excessive payments. In part because of concerns that large DSH payments were not being used to support certain hospitals but were instead being used for general state financing, Congress passed legislation in 1993 and 1997 to restrict states’ ability to make excessive DSH payments. After these restrictions were put in place, combined state and federal DSH payments declined, totaling approximately $14 billion in fiscal year 2003, down from $16 billion in fiscal year 1999.

One Massachusetts contingency-fee project helped the state increase DSH supplemental payments made to four state-owned hospitals. Massachusetts’s consultant developed projects to take advantage of a temporary DSH increase—which increased federal reimbursements by an estimated $17 million annually. The consultant calculated new DSH limits under the federal rules, which allowed temporary payments up to 175 percent of unreimbursed costs. To increase the amount of DSH payments the state could make to each hospital, the consultant also helped the state reduce its standard Medicaid payment rates for services provided in these hospitals. This action increased the amount of supplemental payments that the state could make and potentially require the hospitals to return.

A second project involved helping Massachusetts to increase federal Medicaid reimbursements for medical services to inmates of state correctional facilities. Payment records indicated that in state fiscal year 2002, the state Medicaid agency paid UMMS nearly $300,000 (a contingency fee of 6 percent of about $5 million in additional federal Medicaid reimbursement) for its work on the project. Generally, medical care for prison inmates is not covered by Medicaid. HHS OIG reported that a contingency-fee consultant in another state, New Jersey, had prepared inappropriate claims that New Jersey used to obtain federal reimbursement for DSH claims for state prisoners. Over a 4-year period, New Jersey inappropriately claimed more than $11 million in federal Medicaid reimbursements for DSH payments made on behalf of prisoners. HHS OIG determined that these payments were unallowable because the state’s Medicaid plan specifically prohibited DSH payments for inmate hospital care. Because medical care for prison inmates can be covered by Medicaid under certain circumstances, we sought additional information from Massachusetts officials to determine if Massachusetts’s arrangement was allowable, but we did not receive information within the time frames of our review.

In addition to the contingency-fee projects in Georgia discussed in this report, Georgia’s consultant also helped the state seek additional federal reimbursements for administrative costs. In particular, the state Medicaid agency began claiming federal reimbursement for the costs of certain activities carried out by county public health departments. Using a rate developed by the consultant, the Medicaid agency claimed reimbursement for the costs of a variety of health department activities serving the public, including school-based presentations, presentations to community groups, mass health screening events, public information campaigns, and events mobilizing community partnerships. Costs associated with general health education programs promoting healthy lifestyles are not allowable under Medicaid, even if a portion of the participants served by the program are on Medicaid. The state’s description of the activities for which claims were made raised questions, but we did not receive information we needed within the time frame of our review to make a full assessment.

Because we believe that separate studies of these three projects would be required to assess their appropriateness, we have referred information about these projects to CMS and HHS OIG for additional review.

Appendix II: Summary of Selected HHS OIG Reports on School-Based Claims in States Employing Consultants

The Department of Health and Human Services’ (HHS) Office of Inspector General (OIG) has completed reviews of school-based claims in 18 states from November 2001 through June 2005. Although these reviews were not specifically targeted at the role of consultants paid on a contingency-fee basis, several of the reports found concerns with the appropriateness of claims from consultants’ projects (see table 4). In fiscal year 2005, HHS OIG initiated a review specifically of consultants’ contingency-fee projects in all categories of claims.

Appendix III: Comments from the Centers for Medicare & Medicaid Services

Appendix IV: Comments from the State of Georgia and GAO’s Response

The following is our response to the State of Georgia’s comments.

GAO’s Response to the State of Georgia’s Comments

Our responses to Georgia’s comments are numbered below to correspond with the state’s various points (reproduced on pp. 67–69). Georgia generally stated that (1) the state’s claims for targeted case management (TCM), rehabilitation services, and supplemental payments were made under state plan provisions approved by the Centers for Medicare & Medicaid Services (CMS) and (2) we incorrectly concluded that the state used federal funds generated from reimbursement-maximizing projects to pay consultants. We have revised the draft to indicate that claims were made under approved state plans. Also, we noted in the draft report that Georgia complied with federal requirements in that it did not claim federal reimbursement for the contingency-fee payments. As discussed below, however, state documents indicated that additional federal funds generated by reimbursement-maximizing projects were the source of the state’s contingency-fee payments to its consultant.

The state provided us with specific comments in five areas, which we summarize and respond to as follows: 1. Georgia commented that we were incorrect in contending that CMS can or should disallow Medicaid claims for TCM because they are an integral part of other state programs. Georgia stated that a statute provides that CMS may not deny payment to a state on the basis that the state was paying for the services from nonfederal funds, and it also said that CMS had approved Georgia’s state plan amendment to cover these services. We based our evaluation of Georgia’s TCM claims on CMS’s current policy, including the agency’s actions in disallowing TCM claims or state plan amendments in other states, and we have focused our concerns on the inconsistent application of CMS’s TCM policy. In applying this policy, CMS had considered arguments similar to those raised by Georgia, and the CMS Administrator’s decision (September 2004) upheld the application of CMS’s current TCM policy. Although we did not evaluate the legal basis for CMS’s TCM policy, we maintain our position that CMS’s policy should be clarified and consistently applied among states. 2. Regarding rehabilitation services, Georgia stated that it has not and is not asking for federal matching funds in excess of costs. We disagree. We found that in some cases the state agencies’ claims to Medicaid were based on facilities’ costs exceeding the agencies’ actual payments to individual facilities. This situation resulted from the agencies’ decision to base claims for payment on the facilities’ estimated costs, rather than on the per diem rate they paid to these facilities. According to the state, one example described in the report of a Medicaid claim that exceeded payments to the facility for all services, was an exceptional circumstance. The state also indicated that this inadvertent practice was ended for all facilities as of April 1, 2004. Although we sought clarification from the state on its comments, the state did not address our finding that the underlying methods for setting Medicaid payment rates was flawed. 3. Regarding supplemental payments, Georgia asserted that it has historically administered its upper payment limit (UPL) program in compliance with existing federal regulations and also stated that it has agreed with CMS to change the financing of its UPL programs beginning in state fiscal year 2006. The state said that, as of July 2005, it will no longer continue the practice we described in our draft report. We revised the report to reflect the state’s agreement with CMS regarding the state’s supplemental payments to government providers. 4. Regarding school-based claims, Georgia commented that we erred in reporting that the state withheld 16 percent of the federal reimbursements from the reimbursement-maximizing project involving claims for services and administrative costs of schools. The state also said the schools receive 100 percent of the federal reimbursements generated and that state fees, which support the administrative costs necessary to ensure that all participating school systems are complying with program requirements, are paid exclusively from local funds. During our review, however, the state provided us a written explanation and a spreadsheet showing what was paid to schools, indicating that it had withheld 16 percent of the federal reimbursements from the school-based project and that participating schools received 84 percent of the federal reimbursements. 5. Regarding administrative claims, Georgia commented that we incorrectly suggested that the state paid its consultants from additional federal Medicaid reimbursements generated from contingency-fee projects. We disagree. Our conclusion was based on the contract that the state signed with its reimbursement-maximizing consultant. The contract states that the contractor (consultant) acknowledges and agrees that no payment is due from the state agencies or the state of Georgia under the contract from state-appropriated funds. Further, the contract explicitly states that the “Contractor’s only source of compensation shall be funds (in the percentage specified in Contractor’s Proposal) generated from Contractor’s performance under this Contract.”

The state also provided us with technical comments, which we have incorporated as appropriate.

Appendix V: Comments from the Commonwealth of Massachusetts and GAO’s Response

GAO’s Response to the Commonwealth of Massachusetts’s Comments

Our responses to Massachusetts’s comments are numbered below to correspond with the state’s various points (reproduced on pp. 73–85). Massachusetts generally stated that (1) nothing in the law prohibits contingency-fee contracts, as long as rates fall within broad requirements for the efficient administration of Medicaid; (2) contingency-fee contracts provide states with resources they otherwise would not have for vital administrative tasks; (3) states remain responsible for ensuring compliance with Medicaid requirements; (4) Medicaid statute and regulations are broadly stated; and (5) states have the responsibility to seek federal resources to help people in need when those resources are lawfully available. The state also provided us with updated information, which we have incorporated in our report.

Massachusetts’s detailed comments and our responses follow.

General Comments

1. Massachusetts noted that the state’s funding methods differed from the typical payment process we describe in the report’s “Background” section. We revised the report to reflect that the state advances from state funds both the federal and nonfederal share of Medicaid payments and then seeks federal reimbursement for those expenditures. 2. Massachusetts commented that we did not sufficiently distinguish between “inappropriate, but lawful” activities and activities that violate specific statutes or regulations. We revised the report to clarify our concerns related to the projects we examined and to more clearly distinguish the basis for our concerns related to the projects that we reviewed. 3. Massachusetts commented that it was acting in accord with its state plan approved by the Centers for Medicare & Medicaid Services (CMS). We revised the report to clarify that CMS had approved Massachusetts’s state plan amendments for targeted case management (TCM) services for each of the four state agencies providing these services. We did not, however, assess whether each of the four agencies’ activities were consistent with the approved state plan. In addition, we described projects in other states to illustrate the inconsistent application of CMS policy. 4. See response 2.

Comments on States’ Use of Contingency-Fee Consultants

5. Massachusetts commented that we focused too much on increased claiming and did not adequately consider the reasons for spending increases and the role of contingency-fee consultants. We disagree. Our presentation of increased federal expenditures was descriptive and was one factor we considered in selecting categories of claims to review. In this section of the report, we drew no conclusions regarding the appropriateness of state claims. As we stated in the draft report, we agree that consultants can have a legitimate role in helping states administer their Medicaid programs. 6. Massachusetts commented that we discussed projects only in five selected areas. On the basis of additional information provided by the state, we revised our report to include summary financial information on other University of Massachusetts Medical School (UMMS) projects, including third-party liability and coordination of benefits activities. Nevertheless, in response to the congressional request for this review, our scope was to include contingency-fee projects in revenue-maximizing areas; more detailed review of other projects was therefore beyond our scope. 7. Massachusetts commented that contingency-fee payments from one state agency to another do not benefit any other party. Our concern is not that one state agency may profit from another. Rather, we are concerned that the two state agencies operating in concert could inappropriately generate additional federal funds.

Comments on Consistency of Contingency-Fee Projects with Law or Policy

8. Massachusetts commented that we are applying CMS policies that have not been well articulated and that CMS has approved its state plan amendments for TCM programs. We use Massachusetts’s TCM programs to illustrate the difficulties states encounter when dealing with unclear CMS guidance and potential disparate treatment by CMS. We acknowledge that CMS approved Massachusetts’s state plan amendments for its TCM programs and clarified the report accordingly. Our concern remains, however, that these TCM programs do not appear to be consistent with CMS’s current TCM policy and are similar to proposals from other states that CMS is currently denying. 9. Massachusetts commented that we relied on a January 2001 letter as CMS policy and that we used criteria—whether the service was authorized by state law, regulation, or policy—that appear inconsistent with provisions of the Technical and Miscellaneous Revenue Act of 1988. We did not rely on CMS’s January 2001 letter as CMS policy. We used the Sate Medicaid Manual (§4302) and the September 2004 Administrator’s decision (Docket No. 2003-02) as CMS policy in this area. In addition, because CMS has not defined services that are integral to another state program, we used the existence of state law, regulation, or policy as an indicator, not a determinant, that TCM services were integral to non-Medicaid programs. 10. Massachusetts commented that managed care payments for children served by the Department of Youth Services do not include rehabilitation provided by state agencies; thus, payments to state agencies for rehabilitation services for these children would not be duplicative. As described in the draft report, we continue to be concerned about the potential duplication of coverage because (1) rehabilitation services are included in the statewide managed care program, which includes children served by other state agencies, and (2) it is unclear whether the Department of Youth Services’ managed care rates include rehabilitation services provided by private providers (as opposed to state agencies), so Medicaid could be paying both private and public providers for the same service. CMS officials agreed with our concerns. 11. Massachusetts did not agree that certain aspects of its upper payment limit (UPL) arrangement—those the state agreed with CMS to end in June 2005—were inappropriate. While the state’s documentation did not provide sufficient detail for us to assess the aspects of the UPL arrangement that it had agreed to end, we revised our characterization of the state’s agreement. Nevertheless, we maintain our view that illusory supplemental payments in which providers net only a small portion of the supplemental payments—such as those made in Massachusetts—are inconsistent with Medicaid’s federal-state partnership. 12. Massachusetts commented that it had undertaken a number of efforts to strengthen oversight of school-based Medicaid claims and provided additional information on two reports from the Department of Health and Human Services’ (HHS) Office of Inspector General (OIG). We revised the report to reflect Massachusetts’s efforts to improve oversight of its school-based claims. We also revised the report to clarify that, upon further review, CMS did not impose the full HHS OIG–recommended disallowance of $2.9 million but, rather, imposed a $1.2 million disallowance. 13. Massachusetts disagreed with our view that UMMS’s role as a contingency-fee consultant working for school districts to prepare their claims and as a contingency-fee consultant working for the state to monitor school district claims creates the appearance of a conflict of interest. On the basis of our discussions with UMMS and state Medicaid agency officials and our review of state documents, we maintain our view but revised the report to more specifically show UMMS’s role in ensuring the integrity of those claims submitted by schools, including reviewing and performing quality-control measures on local school cost information. 14. Massachusetts disagreed with our finding in the draft report that UMMS had inappropriately charged salaries for two senior UMMS officials as Medicaid administrative expenditures, providing an agreement between the Medicaid agency and UMMS as support. Regarding one official, we maintain our view that UMMS charged excessive time as a Massachusetts Medicaid administrative expenditure. Although UMMS charged 100 percent of the official’s salary as a Massachusetts expenditure, time sheets provided by the state Medicaid agency showed that in some months, the UMMS official charged from 2 to 5 percent of his time to “out-of-state” projects. Whether the official worked for the Medicaid agency or UMMS, time spent on out-of-state projects should not be claimed as a Massachusetts Medicaid administrative expenditure. Regarding discussion of a second official’s time charges, we removed references to this official in the report on the basis of additional information provided by the state.

Comments on State and CMS Oversight of Contingency-Fee Projects

15. Massachusetts commented that the draft report focused on state Medicaid agency policy, not operations, and that it disagreed that state policies are inappropriate. In our review of individual projects and state Medicaid agency oversight, we examined and reported on both the procedures and the policies the state Medicaid agency had in place to oversee the activities of its contingency-fee consultants. We maintain our view that some state Medicaid agency policies, such as those allowing multiple agencies to bill Medicaid for the same service for the same beneficiary each month and supplemental payments that do not fully accrue to providers, are inappropriate. 16. Massachusetts commented that the Department of Mental Retardation’s contact with clients does not necessarily occur each month, although we found the department had automatically billed Medicaid for its TCM caseload each month. The state agreed that the agency’s billing was an area that can be improved and that a new management information system planned for state fiscal year 2006 would allow automated verification of client contacts during the billing process. We revised the report to reflect the updated figure for the department’s claims in state fiscal year 2004. 17. Massachusetts commented that its policy of allowing multiple agencies to bill Medicaid for TCM services for the same beneficiary each month did not constitute inappropriate double-billing. We reviewed information provided by the state during our review and concluded that the state did not provide convincing evidence that the TCM services provided by the four state agencies were unique. We discussed the matter with CMS and HHS OIG officials, and they concurred with our conclusion. We continue to believe that further review is needed. 18. Massachusetts commented that its project for supplemental disproportionate share hospital (DSH) payments was authorized by Congress and approved by CMS and that the state disagreed with our view that such payments can be illusory. We did not question the state’s authority to make supplemental DSH payments up to 175 percent of unreimbursed costs, consistent with statutory authority to do so for a 2-year period. Rather, our concern was that hospitals should benefit from increased federal reimbursements and Massachusetts’s arrangement appeared to result in lower payments to hospitals, despite increased claims for federal reimbursement. Because we did not fully assess the state’s DSH payment process and net payments to hospitals, our concerns remain, and we believe that further review is warranted.

Appendix VI: GAO Contact and Staff Acknowledgments

GAO Contact

Acknowledgments

Major contributors included Terry Saiki, Tim Bushfield, Jill M. Peterson, Ellen M. Smith, Ellen W. Chu, Helen Desaulniers, and Kevin Milne.

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