Ryan White CARE Act: Effects of Certain Funding Provisions on Grant Awards
Released: 2009-09-18T00:00:00

Letter

Background

CARE Act base grants are distributed through a formula that includes HIV/AIDS case counts. Through its HIV/AIDS surveillance system, CDC receives case counts from states, the District of Columbia, and U.S. territories and associated jurisdictions. CDC provides these case counts to HRSA so that HRSA may determine CARE Act formula grant amounts. In fiscal year 2009, HRSA distributed approximately $410 million by formula under Part A of the CARE Act and about $1.1 billion by formula under Part B.

Fifty-six metropolitan areas received Part A funds in fiscal year 2009. Twenty-four of the metropolitan areas were classified by HRSA as EMAs and 32 as TGAs. For fiscal years 2008 and 2009, the hold-harmless provision provided that an EMA receive at least 100 percent of the amount it had received as its base grant, including hold harmless funding, for fiscal year 2007.

Part B of the CARE Act provides funds to all 50 states, the District of Columbia, the Commonwealth of Puerto Rico, Guam, the U.S. Virgin Islands, and 5 other territories and associated jurisdictions. Part B grants include grants for HIV/AIDS services that are awarded by formula, AIDS Drug Assistance Program (ADAP) grants that are awarded by formula, emerging community grants that are awarded by formula for HIV/AIDS services, Part B supplemental grants for HIV/AIDS services, and ADAP supplemental grants. RWTMA contained a hold-harmless provision that protects funding for Part B base grants and ADAP base grants. For fiscal years 2008 and 2009, a grantee’s total Part B base and ADAP base grants would be at least 100 percent of the total of such grants in fiscal year 2007.

One condition of an ADAP grant is that grantees use every means at their disposal to secure the best price available for all products on their formularies. Best prices are determined by the prices that can be obtained under the 340B drug pricing program. Generally, an ADAP purchasing drugs through the 340B program can use a direct purchasing option or rebate option. Under the 340B direct purchase option, ADAPs purchase drugs from drug manufacturers or through a third-party such as a drug purchasing agent. Using the 340B direct purchase option, ADAPs receive the 340B price discount up front. Under the rebate option, ADAPs typically contract with entities such as a pharmacy network or pharmacy benefits manager for purchase of covered drugs. ADAPs later request a rebate consistent with the section 340B price from the drug manufacturers.

Due to RWTMA’s requirement that CARE Act formula funding be determined by using name-based HIV/AIDS counts, grantees collecting HIV case counts by code must transition to such a reporting system. Although all grantees had name-based AIDS reporting systems, at the time of RWTMA seven grantees still used code-based HIV reporting systems, while 17 others had recently transitioned to a name-based HIV reporting system. It can take several years to transition to a name-based system because grantees must identify by name each case originally reported by code and then enter each case into the new, name-based reporting system. During the transition period from a code-based to a name-based system, a grantee can report its code-based HIV counts directly to HRSA and have these counts used to determine funding for fiscal years 2007 through 2009. However, in accordance with RWTMA, for each grantee relying on a code- based system, HRSA made a 5 percent reduction in the number of living HIV cases to adjust for potential duplicate reporting in systems that collect code-based case counts, thus reducing the award. RWTMA allowed the use of code-based HIV case counts through fiscal year 2009; it also provided that the status of a grantee under RWTMA for purposes of the transition period may not be considered after fiscal year 2009. Grantees that are transitioning to a name-based HIV reporting system determine when their name-based counts will be used by HRSA to calculate CARE Act formula funding. If the exemption permitting code-based reporting is not extended, it is likely that future fiscal year funding will be based exclusively on name-based counts. A grantee that had not completed the transition from code- to name-based case counts could face a reduction in funding because its name-based HIV reporting system could contain fewer cases than its code-based system.

Once a grantee has transitioned to a name-based HIV reporting system, its system must be determined to be operational, as well as accurate and reliable, in order for a grantee’s name-based case counts to be used for funding purposes. To be operational, CDC, in consultation with the grantee’s HIV/AIDS surveillance program and epidemiologist, considers several factors, such as the grantee’s process for ensuring HIV-positive individuals are only counted once and the number of providers and laboratories within the grantee’s jurisdiction diagnosing and reporting HIV positive diagnoses to the grantee. The date CDC allows grantees to report name-based HIV cases to it is considered the date the reporting system becomes operational. Once the name-based HIV reporting system is declared operational, a grantee can determine that its reporting system is accurate and reliable (i.e., its case counts are complete), and can elect to have CDC send HRSA its name-based case counts to determine CARE Act formula funding. A grantee may declare its system to be accurate and reliable anytime after the system has been determined to be operational. However, regardless of the grantee’s assessment, CDC considers a HIV reporting system to be accurate and reliable no later than 4 years after the grantee began collecting name-based HIV case counts. After a grantee determines that its system is accurate and reliable, or after the 4-year period, CDC transmits the HIV case counts to HRSA to be used in the funding formulas.

RWTMA required HRSA to cancel funds from grantees’ awards that are unobligated at the end of the grant year, recover funds that had been disbursed, and redistribute these funds to other grantees. These unobligated balance provisions apply to base and supplemental grant awards under Parts A and B. For 2007 grants, HRSA required grantees to estimate and report their unobligated balance to HRSA 60 days prior to the end of the grant year. Grantees were also required to submit a Financial Status Report (FSR) to HRSA 90 days after the grant year ends. Grantees must report their actual unobligated balance on the FSR and the unobligated balance can be updated by the grantee for up to 6 months after the FSR is due. Unobligated balances of grant awards are canceled (with disbursed funds recovered) and then redistributed to grantees who apply for them as additional amounts for supplemental grants under Part A and Part B in the next fiscal year after the unobligated funds were reported.

For base grant funds, the impact of unobligated balances differs based on whether the unobligated amount is more than 2 percent of the grant. All unobligated base grant funds must be canceled and recovered by HRSA if the grantee has not been granted a carryover waiver. HRSA takes this step following receipt of the FSR. In addition to having unobligated funds canceled and recovered unless a carryover waiver is granted, grantees with unobligated Part A, Part B, and ADAP base grant funds in excess of 2 percent of the grant award incur a penalty—a corresponding reduction in grant funds for the first fiscal year beginning after the fiscal year in which the Secretary receives the FSR. Grantees are assessed the reduction even if they were granted a waiver. Because FSRs are submitted 90 days after the grant year ends, grants for the next year have already been made by the time HRSA has received the information necessary to determine which grantees have an unobligated balance greater than 2 percent. As a result, there is a 1 year lag time between when the unobligated balance occurs and when the penalty is assessed. For example, if a grantee had an unobligated balance of 3 percent in grant year 2007, the grantee’s FSR would have been filed in grant year 2008, and the dollar amount of the 2007 unobligated balance would have been deducted from the grantee’s award in grant year 2009. Figure 1 shows such a time line for 2007 Part B grant distribution and the unobligated balance provisions.

In addition, grantees with unobligated balances of greater than 2 percent of Part A or Part B base grants are ineligible to receive supplemental grants for the year in which the reduction takes place. For Part A grantees this means that they are not eligible to receive Part A supplemental grants. For Part B base grantees this results in ineligibility to receive Part B supplemental grants. For Part B ADAP grantees, an unobligated balance of greater than 2 percent does not result in ineligibility for ADAP supplemental grants. Instead, ineligibility for the ADAP supplemental grant is based on a grantee not obligating at least 75 percent of its entire Part B grant award within 120 days. Table 1 lists the triggers and penalties for the unobligated balance provisions.

Not All Grantees Had HRSA Use Their Name-Based HIV Case Counts for Fiscal Year 2009 Formula Funding, but Most Part B Grantees Are Collecting Name- Based HIV Case Counts in Their Reporting Systems

Most Part B grantees were collecting name-based HIV case counts in their reporting systems as of December 31, 2007, but not all grantees had HRSA use these case counts to determine fiscal year 2009 CARE Act funding. For 47 of the 59 Part B grantees, HRSA used name-based HIV case counts, as provided by CDC, to determine CARE Act funding. The remaining 12 grantees had HRSA use their code-based HIV case counts to determine fiscal year 2009 CARE Act funding. Seven of the 12 grantees—California, the District of Columbia, Illinois, Maryland, Massachusetts, Oregon, and Rhode Island—were collecting name-based HIV case counts as of December 31, 2007, but submitted their code-based case counts to HRSA to determine CARE Act funding. Five of the 12 grantees—Hawaii, Vermont, the Federated States of Micronesia, Palau, and the Republic of the Marshall Islands—were not collecting name-based case counts as of December 31, 2007. Table 2 lists the 12 grantees for which code-based HIV case counts were used for fiscal year 2009 CARE Act formula funding, and the month and year that they began collecting name-based case counts. Each of these 12 grantees could require 4 years from the date they began collecting name-based HIV case counts for their name-based HIV reporting systems to be considered accurate and reliable. However, grantees can determine that their reporting systems are accurate and reliable in less than 4 years.

Although 56 of the 59 Part B grantees are currently collecting name-based HIV case counts, some grantees could face a reduction in fiscal year 2010 funding if HRSA uses these counts to determine fiscal year 2010 funding. RWTMA allows grantees to submit code-based case counts to HRSA to determine funding for fiscal years 2007 through 2009; without an extension as part of the upcoming reauthorization, it is likely that HRSA would determine CARE Act funding for fiscal year 2010 using name-based case counts collected through December 2008. However, this could be problematic for some grantees. For example, as of December 2008, Vermont had only been collecting name-based case counts for 8 months. If Vermont’s system is not considered to be accurate and reliable—which could take up to 4 years—but its December 2008 name-based case count is nevertheless used to determine fiscal year 2010 funding, Vermont may not actually receive funding commensurate with the number of HIV/AIDS cases in the state, which is the intended basis for the formula grant. Further, its funding may be a reduction from what it received for fiscal year 2009.

CDC has provided assistance for grantees transitioning from a code-based to a name-based HIV reporting system. CDC has provided grantees with technical assistance materials, ongoing assistance via conference calls, and additional assistance upon request. According to CDC, the District of Columbia and Massachusetts were the only Part B grantees that requested additional assistance in transitioning to a name-based system. CDC and HRSA plan to meet with grantee officials from the Federated States of Micronesia, Palau, and the Republic of the Marshall Islands to discuss HIV reporting.

Hold-Harmless Funding Was More Widely Distributed among EMAs in Fiscal Year 2009 Than in Fiscal Year 2004, but the Range of Funding Differences per Case Decreased

Part A hold-harmless funding was more widely distributed among EMAs in fiscal year 2009 than in fiscal year 2004. A larger percentage of EMAs qualified for hold-harmless funding in fiscal year 2009 than in fiscal year 2004, the last year for which we reported this information. About 71 percent of EMAs received hold-harmless funding in fiscal year 2009, while 41 percent received hold-harmless funding in fiscal year 2004. Furthermore, the percentage of the total hold-harmless funding received by the EMA with the most hold-harmless funding was smaller in fiscal year 2009 than in fiscal year 2004. In fiscal year 2009, New York received 52.7 percent of the hold-harmless funding, while in fiscal year 2004, San Francisco received 91.6 percent of the hold-harmless funding. In addition to hold-harmless funding being more widely distributed in fiscal year 2009 than in fiscal year 2004, the total amount of hold-harmless funding provided to EMAs was larger in fiscal year 2009 than in fiscal year 2004. In fiscal year 2009, $24,836,500 in hold-harmless funding was distributed compared to $8,033,563 in fiscal year 2004. Table 3 lists the EMAs and their base grant and hold-harmless funding in fiscal years 2009 and 2004.

The range of CARE Act funding differences among EMAs, as measured by funding per case, was smaller in 2009 than in 2004. In fiscal year 2009, EMA base funding per case ranged from $645 to $854, a range of $209. In fiscal year 2004, the funding per case ranged from $1,221 to $2,241, a range of $1,020. The smaller funding range resulted from San Francisco receiving less hold-harmless funding in fiscal year 2009 than in fiscal year 2004. In both years, San Francisco received the most hold-harmless funding per case. However, in fiscal year 2009, San Francisco received $208 in hold- harmless funding per case, while in fiscal year 2004 it received $1,020 in hold-harmless funding per case. Table 4 lists the 24 EMAs and their base grant and hold-harmless funding per case in fiscal years 2009 and 2004.

Hold-harmless funding accounted for a larger percentage of San Francisco’s total base funding than it did for any other EMA in fiscal years 2009 and 2004, but the percentage was smaller in fiscal year 2009 than in fiscal year 2004. In fiscal year 2004, hold-harmless funding accounted for approximately 46 percent of San Francisco’s base grant while in fiscal year 2009 hold-harmless funding accounted for approximately 24 percent of San Francisco’s base grant. Table 5 lists the 24 EMAs and their hold- harmless funding as a percent of their base grants in fiscal years 2009 and 2004.

In some cases, hold-harmless funding in fiscal year 2009 accounted for a significant portion of a grantee’s Part A base funding. For example, San Francisco, which received the most hold-harmless funding per HIV/AIDS case in fiscal year 2009, received a total of $14,672,553 in base funding. Of this amount, $3,571,649 or 24.3 percent was due to the hold-harmless provision. Because of its hold-harmless funding, San Francisco, which had 17,173 HIV/AIDS cases, received a base grant equivalent to what an EMA with approximately 22,713 HIV/AIDS cases (32 percent more) would have received without hold-harmless funding.

A significant portion of the differences in funding per case between San Francisco and the other EMAs results from how the San Francisco case counts are determined. The San Francisco EMA continues to be the only metropolitan area whose formula funding is based on both living and deceased AIDS cases. In February 2006 and October 2007, we reported that the San Francisco EMA was the only EMA still receiving CARE Act formula funding based on the number of living and deceased cases in a metropolitan area. All other EMAs received formula funding based on an estimate of the number of living cases. We showed that the fiscal year 2004 CARE Act formula funding for the San Francisco EMA was determined in part with reference to its fiscal year 1995 funding, which was based on both living and deceased AIDS cases. Because the San Francisco EMA also received hold-harmless funding in fiscal years 2005, 2006, 2007, and 2009, its fiscal year 2009 CARE Act formula funding continues to be based, in part, on the number of deceased cases in the San Francisco EMA as of 1995. Hold-harmless funding for other EMAs does not trace back to 1995 or earlier, a period when CARE Act funding was based on cumulative counts of AIDS cases, both living and deceased.

If there had been no hold-harmless provision in fiscal year 2009, most grantees would have received more funding in fiscal year 2009 than they did. Seventeen of the 24 EMAs would have received more funding if there had been no hold-harmless provision and if the $24.8 million that was used for hold-harmless funding had instead been distributed across all EMAs as supplemental grants, that is, in the same proportions as the supplemental grants. The funds used to meet the EMA hold-harmless requirement are deducted from the funds that would otherwise be available for supplemental grants before these grants are awarded. As a consequence, the pool of funds for supplemental grants is reduced by the amount of funding needed to meet the hold-harmless provision. Although 17 EMAs received hold-harmless funding in fiscal year 2009, only 7 (New York, San Francisco, San Juan, West Palm Beach, Newark, New Haven, and Nassau- Suffolk) received more funding because of the hold-harmless provision than they would have received through supplemental grants in the absence of the hold-harmless provision.

Sixteen Grantees Had Reductions in Their 2009 Grants Due to Their Unobligated Part B Balances at the End of Grant Year 2007

Sixteen Part B grantees received reduced funding in grant year 2009 because they had unobligated balances over 2 percent in grant year 2007. Grantees we interviewed provided reasons why it is difficult to obligate all but 2 percent of their grant award. Grantees and HRSA said that drug rebates complicate grantees’ efforts to obligate grant funds.

Sixteen Part B Grantees Were Assessed Penalties Under the RWTMA Unobligated Balance Provisions Because They Had Unobligated Balances over 2 Percent

Nine states and seven territories and associated jurisdictions were assessed penalties in grant year 2009 because they had unobligated balances over 2 percent in grant year 2007. Arizona, Arkansas, Colorado, Delaware, Idaho, Maine, Nebraska, Ohio, and Pennsylvania were all assessed penalties along with seven of the U.S. territories and associated jurisdictions (American Samoa, Commonwealth of the Northern Mariana Islands, the Federated States of Micronesia, Guam, Palau, the Republic of Marshall Islands, and the U.S. Virgin Islands). Table 6 shows the Part B grant year 2007 unobligated balances. No Part A grantees had unobligated balances over 2 percent.

To establish if an unobligated balance penalty applied to a grantee’s 2009 grant, HRSA summed the Part B base and ADAP base unobligated balances to determine if the total was more than 2 percent of the grantee’s total award (Part B base and ADAP base) for grant year 2007. As the provisions were applied by HRSA, Part B grantees can incur a penalty in both their Part B base and ADAP base grants even if the unobligated balance for one of these grants is less than 2 percent as long as the sum of the Part B base and ADAP base balances is greater than 2 percent. HRSA assesses unobligated balance penalties based on the sum of the Part B base and ADAP base unobligated balances. For example, in grant year 2007 Maine had an unobligated balance of more than 2 percent in its ADAP base grant but less than 2 percent in its Part B base grant. The total unobligated funding was 2.4 percent. Because the total was above 2 percent, HRSA reduced both the Part B base and ADAP base grants in grant year 2009.

While 16 Part B grantees incurred unobligated balance penalties, some incurred penalties in both their Part B base grants and ADAP base grants and others only had penalties in their Part B base grants because they did not have unobligated ADAP balances. In grant year 2009, six states and one territory were assessed penalties in both their Part B base and ADAP base grants. Because penalties apply to both base grants only when grantees have unobligated balances in both grants, three states and six territories and associated jurisdictions had penalties assessed only on their Part B base grants, because they did not have unobligated ADAP base balances. Part B base funding penalties ranged from $6,433 in Palau to $1,493,935 in Ohio. (See table 7.) ADAP base funding penalties ranged from $26,233 in Maine to $12,670,248 in Pennsylvania. (See table 8.) Pennsylvania’s ADAP base grant penalty accounted for 84 percent of the total amount of penalties for unobligated ADAP funds levied on 2009 grants.

In order to calculate the final Part B base and ADAP base grant awards, the penalty attributable to an unobligated balance is applied after other calculations are made, including hold harmless funding. If hold-harmless funds were added after the unobligated balance penalties were applied, hold-harmless funds would negate the effect of the unobligated balance penalties because they would increase funding. For example, Colorado had a preliminary 2009 Part B base grant award of $3,666,928. Under the hold-harmless provision in RWTMA, Colorado was guaranteed Part B base grant funding of $3,683,544. Application of the RWTMA unobligated balance provision reduced the amount of its Part B base grant award (after the addition of hold harmless funding) by $734,240, leaving Colorado with a final Part B base grant award of $3,099,404. In comparison, if hold- harmless funding had been added after the application of the unobligated balance penalty, Colorado would have received $3,683,544, the same as if it had incurred no unobligated balance penalty.

Grantees Provided Reasons Why Obligating All but 2 Percent of Their Grant Awards Is Difficult

Five of the 13 Part B grantees we interviewed had unobligated balances over 2 percent; these 5 grantees told us that they had varying reasons for their unobligated balances, some of which they said were beyond their control. For example, Arizona explained that it had an unobligated balance from its ADAP base grant, in part, because it had a dispute with a vendor it had contracted with to provide prescription drugs to clients. The vendor claimed that it had not been paid for services. According to state officials, to settle the dispute and comply with applicable state rules Arizona had to pay the vendor twice. When the vendor realized that it had been overpaid, it reimbursed Arizona in the amount of $670,000. Arizona received the reimbursement at the end of the grant year. Arizona was unable to spend this amount, leaving it with an unobligated balance of over 2 percent and a subsequent penalty.

Grantees we interviewed, which included those that had unobligated balances of over 2 percent and those that did not, explained that they experienced difficulty obligating grant funds within the grant year. Three of the 13 Part B grantees we interviewed explained that they are currently dealing with economic factors such as state hiring freezes, spending caps, and furloughs of staff. One grantee explained that because of economic difficulties, his state has implemented new procedures as a means to limit state spending, including reclaiming state funding balances that are not spent quickly. Because of this new procedure, the grantee must allocate state funding, federal funding, and program income simultaneously, which he finds difficult. One grantee said the existence of the state hiring freeze has limited the amount of grant funding that could be obligated to fund staff positions. The grantee stated that the hiring freeze has been implemented as a means to limit state spending, but the state has imposed the hiring freeze on all programs, including those that receive federal funds.

One Part B grantee explained that, while the grantee can to some extent control the contracts that are entered into and types of services that are provided, the grantee cannot control factors that affect the demand for program services. For example, the grantee cannot control the number of people who become infected; those who will lose their jobs and private health insurance and need to receive services supported with grant funds; and changes that occur with Medicaid and Medicare that can affect clients. Additionally, two grantees stated that because the grant awards can arrive after April 1, it can be helpful to carry over funds from the previous year’s grant award so that they can award contracts, rather than delay them until HRSA awards grant funds. These grantees said that they would like to be able to carry over funds without risking a reduction in future funding.

One grantee explained that because grant awards are based on a formula and can fluctuate from year to year, it is helpful for the grantee to have funding on hand to maintain consistent service levels even if formula funding is decreased without risking a penalty. Six grantees expressed concern that the level of oversight required to obligate all but 2 percent of their grants leaves them unable to deal with unpredictable situations, such as a contractor going out of business. Six of the 13 grantees we interviewed said that they consider the 2 percent threshold too low, and some suggested that a 5 percent threshold would be more reasonable. Two of these grantees told us that if grantees had to obligate all but 5 percent of their funding, they would have more room to manage their budgets. However, only 2 of the 16 Part B grantees that received penalties for unobligated balances had unobligated balances of less than 5 percent.

Grantees and HRSA Said Drug Rebates Make It Difficult for Grantees to Obligate Grant Funds

According to information provided by HRSA, 7 of the 13 Part B grantees we interviewed received drug rebates. In addition, Delaware informed us that they also receive rebates. Four of the eight grantees that received rebates said that the requirement that they spend drug rebates before spending grant funds makes it more difficult for them to obligate all but 2 percent of their grant awards, even though drug rebates are not subject to the unobligated balance provisions. The 27 Part B grantees that exclusively use the federal 340B rebate option to purchase their ADAP drugs typically contract with pharmacy networks or pharmacy benefit managers for the purchase of covered drugs who then request rebates from the pharmaceutical companies in order to obtain the 340B drug price and pass these savings on to the grantee. Under RWTMA, drug rebates that grantees receive are not considered part of the grant award and are not subject to the unobligated balance provisions. However, federal regulations generally applicable to state and local government grantees require them to disburse rebates (along with program income and certain other amounts) before requesting additional cash payments. Accordingly, HRSA requires rebates to be spent before grantees obligate additional grant funds. Thus, grantees receiving drug rebates must prioritize spending these funds and several grantees said that this makes it more difficult to obligate grant funds in the grant year.

While only three of the nine states that had a reduction in their ADAP base grants for grant year 2009 due to an unobligated balance received rebates, five of the eight grantees we interviewed that received rebates expressed concern about the requirement that drug rebate funds be spent before grant funds. One grantee explained that though it did not have an unobligated balance for grant year 2007, it took a great deal of effort to avoid one. Before RWTMA and the budget challenges in this state, this grantee saved state funds to spend at the end of the grant year so it could ensure that Part B funds were obligated and rebate funds were spent. However, because of state spending requirements put in place due to economic factors this state is currently facing, the grantee can no longer do this. In addition, spending rebates first can be difficult because rebate states often do not know when they will receive rebates; the state may send out requests every quarter, but may not receive the rebates until well into the next quarter or grant year. Rebate states may also not know the rebate amount beyond what they can estimate based on trends over the past year. Several grantees said that because of the variability of the rebate amounts and their timing, they could receive a large rebate check late in the year. They then could have unobligated balances of grant funds of greater than 2 percent at that time because they use the rebate amounts when they become available rather than grant funds.

Pennsylvania had an unobligated ADAP base grant balance of $12,670,248 in grant year 2007, and state officials said that a large part of the reason was its ADAP drug rebates. In grant year 2007, Pennsylvania received $11 million in rebates. These rebate funds had to be spent before it could obligate its ADAP base funding for grant year 2007. According to Pennsylvania officials, the Pennsylvania grantee has an administrative structure that only allows it to spend its rebates on the purchase of drugs, limiting how it could spend its rebate funds. Other states we spoke to can use rebate funds to provide Part B medical services as well, providing them with greater flexibility in spending these funds. Pennsylvania officials told us that they also had an unobligated balance of its ADAP base grant of over $2.4 million in grant year 2008. The Pennsylvania state government is working to revise its current structure.

HRSA sought to address the interaction between drug rebate funds and the RWTMA unobligated balance provisions by requesting from HHS permission to seek an exemption from the regulation for grantees from the Office of Management and Budget. HRSA told us that requiring ADAP rebate funds to be spent before grant funds increases the risk of unobligated balance penalties, and that the loss of grant funding and ineligibility for supplemental funding can pose difficulties for grantees. HRSA requested permission to seek an exemption from the otherwise applicable federal regulations for drug rebate states from HHS. HRSA believes the unobligated balance requirements were intended to ensure that federal funds are spent promptly, not to create a mechanism through which federal grants would be reduced. However, HRSA’s request for permission to seek an exemption for drug rebate states was denied by HHS in November 2007. HHS stated that while federal regulations and the unobligated balance provisions create significant challenges for rebate states, the justification HRSA presented for the class deviation was “not compelling.”

Agency Comments

HHS provided technical comments on a draft of the report, which we incorporated as appropriate.

We are sending copies of this report to the Secretary of Health and Human Services. The report is also available at no charge on GAO’s Web site at http://www.gao.gov.

If you or your staffs have any questions, please contact me at (202) 512- 7114 or crossem@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may found on the last page of this report. Other staff who made major contributions to this report are listed in appendix I.

Appendix I: GAO Contact and Staff Acknowledgments

Staff Acknowledgments

In addition to the contact above, Thomas Conahan, Assistant Director; Robert Copeland, Assistant Director; Leonard Brown; Romonda McKinney Bumpus; Cathleen Hamann; Sarah Resavy; Rachel Svoboda; and Jennifer Whitworth made key contributions to this report.