Medicaid Demonstrations: Approval Criteria and Documentation Need to Show How Spending Furthers Medicaid Objectives
Released: 2015-05-13T00:00:00

Letter

Background

Each state administers its Medicaid program in accordance with its own state plan, which must be reviewed and approved by HHS, and must delineate, among other things, the groups of individuals to be covered, services to be provided, and methodologies for providers to be reimbursed. Within broad federal requirements, states have flexibility in deciding which individuals to cover and the range of medical services to provide in their Medicaid programs. For example, states generally must cover certain “mandatory” populations and benefits, such as low-income children and pregnant women and inpatient and outpatient hospital services, but they also have the option of covering “optional” categories of individuals and benefits such as children with higher family incomes. Additionally, coverage of certain institutional services is mandatory under Medicaid, while coverage of most home- and community-based services (HCBS) is optional for states. States may also choose from different delivery systems, such as fee-for-service or managed care.

Under Medicaid, states pay health care providers based on provider claims for eligible services rendered to Medicaid beneficiaries. In addition to payments for covered services, states often make Medicaid supplemental payments to providers, which are typically lump sum payments that are separate from and in addition to payments made to providers using regular Medicaid payment rates. One type of supplemental payment states may make to hospitals is Disproportionate Share Hospital (DSH) payments. Congress created the DSH program to help hospitals serving Medicaid and uninsured patients offset their uncompensated care costs, within facility-specific and state-specific caps, or limits. States may also make other supplemental payments under their state plan, sometimes referred to as “Upper Payment Limit (UPL) payments,” to providers such as hospitals and nursing homes. These payments are based on the difference between the amount that Medicaid paid for services using regular Medicaid payment rates and the UPL, which is an estimate of what the federal Medicare program would pay for similar services.supplemental Medicaid payments to providers under section 1115 demonstrations.

Section 1115 Demonstrations

If a state wishes to change its Medicaid program in ways that deviate from certain federal requirements, it may seek to do so under the authority of an approved demonstration, outside its state plan. For example, section 1115 demonstrations can enable states to test new approaches to beneficiaries’ health care delivery to generate savings or efficiencies by expanding benefits to cover populations that would not otherwise be eligible for Medicaid or altering the Medicaid benefit package for categories of covered populations while still qualifying for federal matching funds.demonstrations are often approved to expand Medicaid coverage, HHS also allows states to make changes to their existing expenditure authorities, which can include limiting or ending previously approved coverage. To obtain approval under section 1115 of the Social Security Act, a state’s demonstration must, in the Secretary’s judgment, be likely to promote Medicaid objectives.

While the expenditure authorities included in the States submit applications for section 1115 demonstrations to HHS for review by a federal review team, led by HHS. consist of negotiations, including the exchange of questions and answers between the review team and the state. If the demonstration is approved, HHS issues an award letter to the state and an approval specifying the Medicaid requirements that are being waived, the expenditure authorities approved, and the special terms and conditions. The special terms and conditions encompass the requirements for the demonstration, which include the conditions and limitations on approved expenditure authorities as well as specific reporting and evaluation requirements for the demonstration period. HHS typically approves an 1115 demonstration for an initial 5-year period that can be amended or extended. In general, HHS can withdraw a state’s authority to claim federal funding for expenditures in an 1115 demonstration under certain circumstances, including if the agency determines that the demonstration no longer promotes the objectives of the Medicaid program.

The review team includes representatives from the Office of Management and Budget, other agencies within HHS as applicable, and HHS Secretarial Offices, including the Assistant Secretary for Planning and Evaluation and the Assistant Secretary for Financial Resources. were saving Medicaid funds through efficiencies under the demonstration, such as by implementing managed care. Each approved demonstration has a federal spending limit for purposes of determining budget neutrality. As specified in the special terms and conditions for each demonstration, yearly expenditure targets may be exceeded, but total spending over the time period of the demonstration must be at or under the overall limit.

Effect of the Patient Protection and Affordable Care Act (PPACA) on Medicaid Coverage

For many years, section 1115 demonstrations offered the only avenue for states to provide Medicaid coverage to childless adults, who were generally ineligible under the program, but this changed with the enactment of the Patient Protection and Affordable Care Act (PPACA) in 2010. PPACA brought significant changes to the Medicaid program, including giving states the option to expand Medicaid eligibility to nearly all adults with incomes at or below 133 percent of the Federal Poverty Level (FPL), thus removing the program’s historic exclusion of childless adults from Medicaid eligibility. States opting to cover newly eligible adults qualified for enhanced federal matching funds beginning January 1, 2014.

In addition to providing states with the option to expand Medicaid, PPACA also provided new income-based subsidies to make private health insurance coverage more affordable for certain low- and moderate- income individuals. Specifically, PPACA required the establishment of health insurance exchanges in each state, where, starting January 1, 2014, eligible individuals can purchase health insurance coverage from participating plans. In addition, eligible individuals with low- and moderate-household income may qualify for federal subsidies for this coverage. Individuals with household income between 100 and 400 percent of the FPL may be eligible for federal premium tax credits and individuals with household income between 100 and 250 percent of the FPL may be eligible for cost-sharing reductions.

HHS’s Approvals Often Modified Existing Expenditure Authorities to Limit Medicaid Coverage under Demonstrations as a Result of PPACA’s New Coverage Options

Among the variety of coverage-related expenditure authorities approved or modified by HHS during our review period, there were certain prevailing themes. While HHS did approve some expenditure authorities that extended coverage to new populations or for new benefits, HHS also modified existing expenditure authorities in several states to end or limit coverage of low-income adults or premium assistance payments under states’ demonstrations, as new coverage options became available under PPACA. In addition, in almost half of the states we reviewed, HHS approved or modified expenditure authorities to provide HCBS to certain populations or to provide full Medicaid coverage to populations already receiving HCBS. (See app. I for coverage-related and other types of expenditure authorities approved in all 25 states.)

HHS’s Recent Approvals in More Than Half the States Reviewed Served to Limit Coverage of Low- Income Adults and Payments for Premium Assistance under Demonstrations as New Coverage Options Became Available

In 20 of the 25 states we identified with recent approvals, HHS had approved new or modified existing expenditure authorities for Medicaid coverage, premium assistance, or both, for low-income adults; however, often the approvals were to limit the duration of this coverage as new coverage options became available under PPACA. Twelve of the 20 states had covered low-income adults not eligible for Medicaid prior to 2014 under demonstrations and then had opted to expand Medicaid coverage to low-income individuals starting January 1, 2014, as allowed under PPACA. In most of these 12 states, HHS modified states’ existing expenditure authorities to end their coverage of low-income adults or permitted them to allow this coverage to expire under their demonstrations as of December 31, 2013; in 2 states HHS approved new expenditure authorities allowing the states to start covering low-income adults but just until the end of 2013. Beginning in 2014, some of these populations would likely be covered under the states’ Medicaid plans. Three of the states that limited coverage had not opted to expand These Medicaid, as allowed under PPACA, at the time of our review.states received approval to modify their expenditure authorities to end Medicaid coverage for some individuals with incomes above 100 percent of the FPL under their demonstrations as of December 31, 2013, at which time these individuals could purchase coverage through the exchanges and may also qualify for federal subsidies for this coverage. These states were also approved to maintain coverage for certain individuals with incomes up to 100 percent of the FPL, who would not be eligible for the subsidies if they were to purchase coverage through the exchanges.

Similar to coverage of low-income adults, HHS approved expenditure authorities for premium assistance in 7 of the 20 states during our review period, which often limited the duration of coverage under states’ demonstrations as new coverage options were made available through the exchanges.federal matching funds for different types of premium assistance payments, including those for employer-sponsored insurance and for individual private insurance—purchased either outside of or through the exchanges. Some states had expenditure authorities approved for more than one type of premium assistance. Appendix II provides information on the premium assistance programs included in the 1115 demonstrations we reviewed.

Under these approvals, the states were allowed to claim Employer-sponsored insurance. Six of the seven states had existing expenditure authorities for premium assistance for employer-sponsored insurance, and during our review period, most received approval to shorten the time frames for this coverage to coincide with the implementation of the exchanges. For example, while Vermont’s demonstration is effective until December 2016, the state was approved to end premium assistance for employer-sponsored insurance on December 31, 2013, for several different populations. Idaho received approval to offer premium assistance for individuals with incomes above 100 percent of the FPL through December 31, 2013, after which time these individuals can purchase coverage through the exchange and may be eligible for federal subsidies for this coverage if they meet certain criteria. The state also received approval to provide premium assistance through September 30, 2014, to individuals with lower incomes, who would not be eligible for federal subsidies if they chose to purchase coverage through the exchanges. In contrast, some states received approval during our review period to extend or expand premium assistance for employer-sponsored insurance. For example, in September 2012, Utah—a state that had not expanded Medicaid as provided for under PPACA at the time of our review—received approval to expand income eligibility for its premium assistance program for employer-sponsored insurance for nonelderly workers from at or below 150 percent to at or below 200 percent of the FPL.

Individual insurance. HHS also modified expenditure authorities for premium assistance for private individual insurance coverage in three states—Massachusetts, Oregon, and Vermont—in anticipation of new coverage being available for purchase through the exchanges starting in 2014. For example, in Massachusetts and Vermont the duration of premium assistance was modified for certain adults with higher incomes—above 133 percent in Massachusetts and 150 percent FPL in Vermont—to end December 31, 2013, after which time these individuals could receive federal subsidies to purchase private insurance from the exchanges.premium assistance for certain disabled adults outside of the exchanges after December 31, 2013. In contrast to the three states that limited premium assistance for individual insurance coverage, another state was approved to expand coverage through premium assistance. Specifically, HHS approved a new demonstration in Arkansas, which became the first state to receive expenditure authority allowing federal Medicaid funds be Massachusetts, however, did receive approval to provide used to provide premium assistance to enable newly eligible beneficiaries to purchase private insurance offered through the state’s exchange.

For Almost Half the States Reviewed, HHS Approved Expenditure Authorities Related to the Delivery of Home- and Community- Based Services

HHS approved expenditure authorities in 12 of the 25 states we reviewed that allowed states either to target certain populations to receive HCBS or to provide full Medicaid coverage to populations that were eligible to receive HCBS through other Medicaid authorities. Some of these states received approvals for both options. HCBS encompasses a wide range of services to help individuals who have limited ability to care for themselves—such as some elderly individuals, some individuals with human immunodeficiency virus/ acquired immunodeficiency virus (HIV/AIDS), and some individuals with disabilities—to remain in their homes or live in a community setting instead of receiving these services in an institution, such as a nursing facility. HHS officials noted that states are increasingly seeking expenditure authority under their 1115 demonstrations to cover these types of long-term care services and supports.

HHS approved expenditure authorities in 7 of the 12 states that allowed the states to provide HCBS under their demonstrations to specific populations. For example, Minnesota received approval to provide elderly individuals who had incomes above the state’s Medicaid standards with coverage of HCBS to prevent premature entry into nursing facilities and prevent or delay the spending down of their resources to obtain Medicaid eligibility.

HHS also approved expenditure authorities in 8 of the 12 states that allowed the states to provide full Medicaid coverage under their demonstrations to populations that, prior to the demonstration, were eligible for HCBS. Within Medicaid, states may provide coverage of HCBS through various Medicaid authorities, including through section 1915(c) waivers. Under 1915(c) waivers, states may provide coverage of HCBS for a targeted population that would, if not for the services provided under the waiver, require institutional care. Through expenditure authorities approved in their 1115 demonstrations, the 8 states were allowed to extend full Medicaid coverage to these populations. For example, Delaware was approved to provide full Medicaid benefits for elderly and disabled individuals and also children and adults with HIV/AIDS, who were previously eligible for HCBS.

According to HHS officials, each state that has opted to cover HCBS services or populations under 1115 demonstrations has done so a little differently with respect to how the demonstration works in conjunction with other Medicaid authorities the state may be using to cover HCBS. For example, officials noted that some states have incorporated coverage of all HCBS populations into their 1115 demonstrations, ending their coverage under separate 1915(c) waivers, in order to administer the program more easily. In another model, HHS approved one state— Kansas—to run its demonstration and 1915(c) waiver programs in parallel HHS officials stated even though they may cover the same populations. that they are encouraging states to consider this model because maintaining 1915(c) waivers provides better assurances that states will understand and comply with the quality assurance reporting, beneficiary protection, and other requirements that specifically apply to the HCBS populations through both types of authorities.

In Kansas, one of the main purposes was to enroll individuals eligible under 1915(c) waivers into Medicaid managed care plans.

HHS Approved Expenditure Authorities for a Broad Range of Other Purposes, Including State Programs and New Types of Supplemental Payments

HHS approved expenditure authorities for a broad range of purposes beyond Medicaid coverage in the states we reviewed. Among these, two types allowed significant spending. HHS approved expenditure authorities that allowed states to spend up to $9.5 billion in Medicaid funds for state programs over the course of the demonstrations. HHS also approved expenditure authorities that allowed states to make more than $26 billion in new types of Medicaid supplemental payments to hospitals and other providers through capped funding pools. (See app. III for information about other noncoverage-related expenditure authorities approved by HHS.)

HHS Approved New or Modified Existing Expenditure Authorities for $9.5 Billion in Medicaid Funding for More Than 150 State Programs

During our review period, HHS approved new, and extended or modified existing expenditure authorities that allowed five states—California, Massachusetts, New York, Oregon, and Vermont—to receive federal matching funds for more than150 state-operated programs. These five states were collectively approved to spend $9.5 billion in Medicaid funds for these programs during their current demonstration approval periods, Expenditure authorities for some of which ranged from 2.5 to 5 years.these state programs were in place for longer periods, as demonstrations were extended or amended. (See app. IV for information on the length of time expenditure authorities for some state programs have been continuously approved over the course of their demonstrations.) Prior to being included in the demonstrations, these programs could have been financed with state or non-Medicaid federal funding sources, or a combination of these, such as state appropriations or non-Medicaid federal grant funding. These state programs include those providing outreach and treatment services for specific health conditions, insurance subsidy programs, and workforce development programs, and were operated or funded by a wide range of different state agencies, such as state departments of mental health, public health, corrections, youth services, developmental disabilities, aging, and state educational institutions. The expenditure authorities provided federal funds to the state agencies to support these state programs, but unlike coverage- related expenditure authorities they did not confer Medicaid beneficiary status on the individuals served by the programs. To receive federal matching funds, states must first allocate and spend state resources for each health program. The federal matching funds received could replace some of the state’s expenditures for the programs, freeing up state funding for other purposes. For example, states could use the freed-up state funding to invest in health care quality improvement efforts or health reform initiatives or simply to address shortfalls in states’ budgets.

Massachusetts, New York, and Oregon received approval from HHS for federal Medicaid funding for more than 40 state programs each, and California and Vermont were approved for 17 state programs, collectively. Each approval specifies a limit on the total amount of Medicaid funds available in the aggregate for these programs and the time frame within which these funds must be claimed. On average, states were approved to spend nearly $2 billion (in combined federal and state funding) for state programs for the entire demonstration approval period, which ranged from 2.5 to 5 years. See table 1 for information on the number of state programs included in expenditure authorities approved or modified during our review period.

The expenditure authorities approved by HHS during our review period supported a broad range of state program costs that would not otherwise have been eligible for federal Medicaid funding. While many of the programs offered health-related services, the populations served may have incomes too high to qualify for Medicaid. Among the many categories of approved programs were those providing health-related services; those providing support services, for example, to non-Medicaid- eligible individuals; those providing access to private insurance coverage for targeted groups; and those funding workforce training programs.

Health-related services. Many of HHS’s approved expenditure authorities in five states were for state programs offering a variety of health-related services not necessarily targeted to the Medicaid population. For example, these included programs for treatment of prostate or breast cancer, treatment of alcohol dependency, and immunizations and screenings for newborns across the state.

Support services. HHS approved expenditure authorities for at least 50 state programs in four states that provide support services to families and individuals. These health programs coordinate care for the elderly and persons with chronic mental illness, developmental disabilities, and alcohol dependency, among other conditions, and were not necessarily targeted to the Medicaid population. Additionally, HHS approved funding for state programs providing respite care to caregivers of children with special health care needs, community services for individuals with head injuries, and short-term living arrangements for homeless adolescents transitioning to residential services.

Workforce training. HHS approved expenditure authorities for states to use federal Medicaid funds for more than a dozen employment and workforce training programs. States were approved to use federal Medicaid funding for health care professionals’ training and loan repayment, as well as for efforts to promote health care worker recruitment and retention in hospitals and nursing homes.

Private insurance subsidies for private health coverage purchased on exchanges. HHS also approved expenditure authorities in two states—Massachusetts and Vermont—to spend up to a combined $86 million in Medicaid funds for their state-funded premium subsidy programs to provide additional assistance to individuals purchasing private insurance coverage through their states’ exchanges, effective January 1, 2014. Subsidies in these two states are offered at eligibility levels corresponding with section 1115 demonstration expenditure authority coverage that existed in these states’ demonstrations up through December 31, 2013. Individuals eligible for this assistance are not Medicaid beneficiaries and instead may qualify for premium tax credits and cost sharing reductions for exchange-purchased coverage, as provided for under PPACA. Because these federal subsidies may not cover the entire cost of individuals’ coverage, Massachusetts and Vermont requested expenditure authority to use Medicaid funding to provide additional assistance to individuals to offset any premium costs for insurance coverage purchased on the exchanges not covered through premium tax credits.

HHS Approved New or Modified Existing Expenditure Authorities for More Than $26 Billion in New Types of Supplemental Payments to Hospitals through Funding Pools for Uncompensated Care and Incentive Payments for Delivery System Improvements

Another major type of noncoverage-related expenditure authority approved by HHS in eight states during our review period was that which allowed states to make new kinds of supplemental payments—that is, payments in addition to base payments for covered services—to hospitals and other providers. During our review period, HHS approved expenditure authorities for pools of dedicated funds—called funding pools—amounting to more than $26 billion over the course of the current approvals, which ranged from 15 months to over 5 years. These expenditure authorities were for flexible funding under funding pools, through which states were authorized to make supplemental payments for uncompensated care or for delivery system or infrastructure improvements. In addition, some states had funding pools approved for other varied purposes, such as graduate medical education. Demonstration funding pools are subject to the limitations set forth in the demonstration’s special terms and conditions, which may differ from those applicable to supplemental payments made under state plans, such as Medicaid UPL and DSH payments.

Funding Pools for Hospital Uncompensated Care Costs

During our review period, HHS approved expenditure authorities for hospital uncompensated care funding pools in Hawaii, Kansas, Missouri, New Mexico, and Tennessee, and modified an existing funding pool in California. The six funding pools, which total about $7.6 billion in approved spending, varied in amount and duration—from $37.5 million over 15 months in Missouri to $4.0 billion over 5 years in California. Payments were intended to cover providers’ uncompensated care costs associated with both Medicaid and uninsured patients, similar to supplemental payments under the DSH program (see table 2).

The expenditure authorities for uncompensated care pools generally allowed states to claim federal matching funds for payments to hospitals for inpatient and outpatient uncompensated care costs, as can be done with DSH funds. In some cases, HHS also authorized uncompensated care pools for broader uses, including for other services and provider types. For example, the amendment to California’s demonstration approved during our review period created a new category of payments for Indian Health Service clinics and tribal providers in nonhospital settings, which would not be permitted under DSH.

Funding Pools for Incentive Payments to Hospitals

During our review period, HHS approved new expenditure authorities for funding pools to make incentive payments to promote health care delivery system or infrastructure improvements in Kansas, New Jersey, and New Mexico, and modified existing funding pools in California and Texas. The five funding pools, which total nearly $18.8 billion in approved spending, varied in amount—from $29.4 million in New Mexico to $11.4 billion in Texas, generally over a 5-year period. These expenditure authorities were for payments intended to incentivize hospitals, and in some cases their partners, to make a variety of infrastructure and delivery system improvements, such as lowering hospitals’ rates of adverse events or incidence of disease, improving care for patients with certain conditions, and increasing delivery system capacity. According to HHS officials, payments from these pools are not related to the costs of the improvements but rather are established by hospitals, with the state’s and HHS’s approval, as the payments for achieving designated milestones. The nature of the milestones depends on the project type. For example, under New Jersey’s pool, called a Delivery System Reform Incentive Payment (DSRIP) program, hospitals must complete projects designed to improve health care quality, efficiency, or population health from a menu of disease-specific focus areas, such as asthma, diabetes, and chemical See table 3 for expenditure authorities for incentive payment addiction.pools that were approved or modified by HHS during our review period.

HHS approved or modified expenditure authorities for other funding pools for varied, and in some cases unspecified purposes. These included, for example, $250 million for temporary “transition payments” to New Jersey hospitals that previously received supplemental payments under New Jersey’s Medicaid state plan to cover the gap between year 1 of the demonstration and year 2, when the state’s incentive payment pool was to begin. $175 million for additional supplemental payments to two public hospitals in Tennessee, the purposes for which were not specified in the approval, plus $125 million for graduate medical education. $2.9 million in Missouri to support one specialty provider’s overhead costs, which per the special terms and conditions could include costs associated with purchasing billing software, hardware for systems, extended hours of operation, salaries, benefits and payroll taxes, professional and contractual services, supplies, insurance, occupancy costs, depreciation, and other miscellaneous costs.

See appendix V for total spending limits associated with the funding pools of all 11 states that received new or modified expenditure authorities related to funding pools (for any purpose) during our review period—that is, total spending for all funding pools included in the demonstrations, including for pools created prior to our review period.

HHS’s Criteria and Approval Documents Were Not Always Clear as to How Approved Expenditures Would Further Medicaid Objectives

Although section 1115 of the Social Security Act provides HHS with broad authority to approve expenditure authorities that, in the Secretary’s judgment, are likely to promote Medicaid objectives, HHS has not issued specific criteria for making these determinations. Further, HHS’s approval documents were not always clear as to what precisely approved expenditures were for and how they would promote Medicaid objectives. In addition, the approval documents did not always specify how states were to avoid duplication with other federal funding received. In the absence of clear criteria for approving expenditure authorities and clear documentation of the application of those criteria, the bases for HHS’s decisions—involving tens of billions of Medicaid dollars—are not transparent to Congress, states, or the public.

HHS Has Not Issued Specific Criteria for Assessing Whether Expenditure Authorities for State Programs and Funding Pools Promote Medicaid Objectives

While section 1115 of the Social Security Act provides HHS with broad authority in approving expenditure authorities for demonstrations that, in the Secretary’s judgment, are likely to promote Medicaid objectives, HHS officials said the agency has not issued explicit criteria explaining how it assesses whether demonstration expenditures meet this broad statutory requirement. Federal standards for internal control of an agency’s operations stress that in addition to the need for effective internal communications within an agency, management should also ensure there are adequate means of communicating with, and obtaining information from, external stakeholders that may have a significant impact on the agency’s achieving its goals, such as states in the case of Medicaid demonstrations. In our view, the criteria HHS uses for approving expenditure authorities for state programs and funding pools would be subject to such a communication requirement. However, HHS officials informed us that the agency has not communicated specific criteria for assessing these expenditure authorities. For example, HHS’s website identifies different policy approaches that states may seek to test through demonstrations—such as the use of innovative service delivery systems to improve care, increase efficiency, and reduce costs—but does not specify how HHS will evaluate states’ proposals to determine whether the proposed demonstration expenditures are likely to promote Medicaid objectives. In particular, HHS officials said that they have not issued specific written criteria that by themselves would require HHS to approve or disapprove expenditure authorities for specific state programs or funding pools. HHS officials also told us that for a demonstration to be approved, its goals and purposes must provide an important benefit to the Medicaid program, but they did not provide more explicit criteria for determining whether approved demonstration expenditures would provide an important benefit or promote Medicaid objectives.

In the absence of explicit, written criteria, HHS officials described using other approaches for assessing expenditure authorities for state programs and funding pools for alignment with Medicaid objectives. HHS officials said that HHS considers each proposed demonstration on its own merits. Further, HHS officials said they consider how the programs or pools relate to and are connected with overall Medicaid program objectives and other aspects of the demonstration. In assessing expenditure authorities for state programs previously funded by the states, HHS officials said they consider two criteria. First, HHS considers whether the proposal supports a compelling demonstration purpose. Second, HHS considers how the proposed state programs are suitable candidates for federal participation that align with the objectives of the Medicaid statute. HHS officials said they have told states that HHS is less open to approving Medicaid matching funds for state programs in certain categories, such as prisons and corrections, bricks and mortar, and debt relief or restructuring, although at least one state received approval for a program that builds housing for the homeless. HHS officials said that funding pools for uncompensated care must provide necessary support to providers whose continued operation and participation are essential to the delivery of health care to low-income populations. Officials also said that funding pools for incentive payments are assessed in terms of the health care quality improvement and system redesign objectives proposed, their relevance to Medicaid beneficiaries, the inclusion of the most appropriate providers, and whether the incentives are appropriate. In discussing why HHS has not made these considerations public, HHS officials said that it is not in the agency’s interest to issue guidelines that might limit its flexibility in determining which demonstrations promote Medicaid objectives. However, without such guidance, the rationale for the agency’s approvals of expenditure authorities is not transparent.

Approval Documents Did Not Always Specify What Expenditures Were for and How They Would Promote Medicaid Objectives

Demonstration approval documents in the states we reviewed with expenditure authorities for state programs or funding pools did not consistently include information indicating what, specifically, the approved expenditures were for and, therefore, how they would likely promote Medicaid objectives. Federal standards for internal control provide that all decisions, such as demonstration approvals, must be clearly documented and such documentation should be promptly and accurately recorded and available for review.

Among the five states with approved expenditure authorities for state programs, two had approvals that included detailed information about the programs—including program descriptions and target populations—in what the agency refers to as “claiming protocols.” HHS officials explained that claiming protocols for state programs outline the methods by which the state will identify appropriate expenditures and other revenues supporting the programs. HHS required the two states (California and Oregon) to submit and receive approval for the claiming protocols as a condition for claiming federal Medicaid matching funds. It included the claiming protocols as attachments to the special terms and conditions of the states’ approvals, which lay out the state’s obligations under the demonstration. The information provided in the claiming protocols can help explain how the programs may promote Medicaid objectives. However, even when claiming protocols were included, HHS’s basis for approving expenditure authorities for some state programs was not clear. For example, one state received approval for an expenditure authority for a state program that issues licenses and approves certifications of hospitals and certain other providers in the state. The state’s claiming protocol delineated the program’s mission and funding limits but did not explicitly address how the program related to the purposes of the demonstration or to Medicaid objectives.

The approvals for the other three states (Massachusetts, New York, and Vermont), authorizing nearly half of the state programs in our review, did not include claiming protocols for most state programs and otherwise lacked clear information on how the state programs would promote Medicaid objectives, such as how they would benefit low-income populations. Several state programs approved for federal Medicaid funds in these states appeared, on their face, to be only tangentially related to improving health coverage for low-income individuals and lacked documentation explaining how their approval was likely to promote Medicaid objectives. For example, among the programs approved were a program that funds insurance for fishermen and their families at a reduced rate; a program that constructs supportive housing for the homeless; and a program that recruits and aims to retain health care workers. Overall, state programs that were approved for federal Medicaid funds appeared to be wide ranging in nature. Table 4 shows the state programs approved by HHS during our review period, which were generally listed by program name in the special terms and conditions of each state’s approval, but often without any further detailed information.

HHS officials stated that, beginning in 2012, the agency required all states to develop claiming protocols for state programs with more-specific information on their purposes. In its approval of amendments to New York’s demonstration in 2013, HHS required the state to develop a claiming protocol for 20 new state programs but did not require a claiming protocol for any of the 26 existing state programs approved for continued funding. Similarly, in its 2013 approval of amendments to Massachusetts’s demonstration, HHS did not require the state to submit a claiming protocol for 49 existing state programs. In the case of Vermont, HHS officials said that a claiming protocol was not needed to support funding for one program because it was modeled closely on a previously approved demonstration program. HHS officials also said that during the time of our review, they began requesting that states proposing that Medicaid cover certain state programs under demonstration expenditure authorities complete a spreadsheet tool that, among other things, helps to identify and exclude the costs of services for which Medicaid should already be paying.

As with approvals of expenditure authorities for state programs, HHS’s approvals of expenditure authorities for funding pools also did not consistently document how expenditures would likely promote Medicaid objectives. The approvals of incentive payment funding pools we reviewed (California, Kansas, New Jersey, New Mexico, and Texas) established a structure for planning, reporting on, and getting paid for general, system-wide improvements—for example, increasing primary care capacity or lowering admission rates for certain diseases—but most provided little or no detail on how the initiatives related to Medicaid objectives, such as their potential impact on Medicaid beneficiaries or low-income populations. One exception is New Mexico, which was required to select outcome measures that reflected areas of high need for Medicaid and uninsured patients. Further, the criteria for selecting providers eligible to participate in incentive pools were not apparent in most of the approvals we reviewed. HHS officials said that the hospitals that are identified as eligible for incentive payments are those that are expected to have the most impact on efficiency and quality of care for Medicaid populations and that often the hospitals selected are those that have historically received the most supplemental payments, which are generally allocated to providers serving Medicaid populations. However, such selection criteria were not apparent in HHS’s approvals, which listed eligible providers but with no additional information about their role in providing services to Medicaid populations. For example, none of the terms and conditions for the five states’ demonstrations established a minimum threshold of Medicaid or low-income patient volume as the basis for participation; however, three states’ approvals (New Jersey, New Mexico, and Texas) required that the payment allocations be weighted in part on measures of Medicaid or low-income patient workload.

Approval Documents Did Not Always Specify How States Were to Avoid Duplication with Other Sources of Federal Funding

HHS’s approvals also varied in the extent to which they provided assurances that Medicaid funding approved for state programs would be claimed appropriately and would not duplicate any other potential sources of non-Medicaid federal funding. In two of the five states reviewed— California and Oregon—the claiming protocols attached to the terms and conditions clearly identified all other federal and nonfederal funding sources for each state program. These protocols also included specific instructions on how the states should “offset” other revenues received by the state programs related to eligible expenditures and how to determine the appropriate federal match based on net expenditures exclusive of any In Medicaid beneficiaries receiving services through the same program.a third state, Massachusetts, HHS’s approval included a general program integrity provision that required the state to have processes in place to ensure that there would be no duplication of federal funding, but the state was not required to develop a claiming protocol accounting for other federal funding sources for its 49 state programs. Further, our review of the expenditure authorities for state programs in two states—New York and Vermont—found that the approvals for 25 state programs did not require claiming protocols or otherwise lacked language expressly prohibiting the states’ use of federal funding for the same purpose. Combined, the state programs in Massachusetts, New York, and Vermont accounted for 74 state programs approved for about $4 billion in total spending. As previously discussed, HHS officials said they started using claiming protocols after 2012; however, at the time of our review, these practices were not applied to previously approved state programs. In addition, in 2012, HHS established an optional application template to assist states in the development of their section 1115 demonstration proposals that included a financing form with instruction for states to identify other federal funds used for the demonstration. The form notes that this information will help HHS identify potential areas of duplicative efforts.

Regarding funding pools for incentive payments, only one state’s terms and conditions required the state (Kansas) to demonstrate that its funding pool was not duplicating any other existing or future federal funding streams for the same purpose, and two other state’s terms and conditions (New Jersey, Texas) required hospitals to demonstrate that incentive projects do not duplicate other HHS initiatives. Apart from including explicit protections against duplication in the terms and conditions, HHS officials said they ask providers to disclose other federal funding they may be receiving or expect to receive that could represent duplicative funding and that they also search federal funding databases to identify potentially duplicative funding.

The extent to which approvals for uncompensated care pools included protections against potential duplication of federal funds was somewhat mixed. The approvals placed some limits on the overlap between payments from the uncompensated care pool and the DSH program but generally did not address all other federal sources of funding. In the five approvals we reviewed with expenditure authorities for hospital uncompensated care pools (California, Hawaii, Kansas, New Mexico, Tennessee), HHS consistently included a requirement that when states calculate their hospitals’ DSH payment limits, they include as offsetting revenue payments received from the uncompensated care pool for inpatient or outpatient services. In the aggregate, however, if states establish uncompensated care pools under demonstrations alongside their state DSH programs, total Medicaid uncompensated care spending within a state—that is, DSH and uncompensated care pool payments combined—could result in the use of section 1115 funds to fill requirements already addressed by statewide DSH allotments. In two of the six states we reviewed with uncompensated care pools (Hawaii and Missouri), HHS imposed an overall limit on total uncompensated care payments (pool payments plus DSH payments) equal to the statewide DSH allotments authorized by Congress. In the other four states, HHS did not impose such a limit, such that total payments for uncompensated care could result in the use of section 1115 funds to fulfill a purpose otherwise limited by statewide DSH allotments.

Conclusions

Section 1115 demonstrations account for a significant and growing proportion of expenditures under the Medicaid program. Ensuring the long-term sustainability of the program is important for the tens of millions of low-income beneficiaries who depend on Medicaid to cover their medical costs. Section 1115 Medicaid demonstrations provide a way for states to test and evaluate new approaches for delivering Medicaid services to beneficiaries. Under these demonstrations, the Secretary of Health and Human Services has broad authority to waive certain Medicaid requirements and approve expenditures for which states would not otherwise be able to receive matching funds. In doing so, the Secretary has responsibility for ensuring the prudent use of federal Medicaid resources, including ensuring that Medicaid expenditures under a demonstration will not significantly increase federal costs for Medicaid above what they would have been without the demonstration. Given the breadth of the Secretary’s authority under section 1115—the exercise of which may result in billions of dollars of federal expenditures for costs not otherwise allowed under Medicaid—explicit criteria are needed to illuminate how HHS determines that new demonstration spending promotes Medicaid objectives. Without explicit criteria, HHS’s decision- making will remain obscure to internal and external stakeholders, including Congress, the states, and the public, and opportunities for effective communication on this subject will remain elusive.

In addition, without documenting the basis for its approvals, HHS cannot provide reasonable assurance that it is consistently applying its criteria for determining whether demonstration expenditures promote Medicaid objectives. Based on our review, some of the Secretary’s approvals of 1115 demonstrations included information that documented how new expenditure authorities would promote Medicaid’s objectives, for example, by including information on how the demonstration related to health coverage for low-income populations. However, other approvals did not. For example, some of the demonstrations were for programs related to health care for the general population without an articulated link to low-income individuals or only tangentially related to improving their health coverage, while others were for funding pools for incentive payments made for a broad array of infrastructure improvements and other broad purposes. Given the amount of money involved and the broad array of purposes for which expenditure authorities have been approved, it is important that HHS document the basis for its decisions that approved expenditure authorities are likely to promote Medicaid’s objectives. Furthermore, demonstration approvals should document how new federal Medicaid expenditures will be coordinated with other federal funding streams available to states for the same or similar purposes to avoid duplication.

Recommendations for Executive Action

To improve the transparency and accountability of HHS’s section 1115 Medicaid demonstration approval process, and to ensure that federal Medicaid funds for the demonstrations do not duplicate other federal funds, we are recommending that the Secretary of Health and Human Services take three actions: 1. Issue criteria for assessing whether section 1115 expenditure authorities are likely to promote Medicaid objectives. 2. Ensure the application of these criteria is documented in all HHS’s approvals of section 1115 demonstrations, including those approving new or extending or modifying existing expenditure authorities, to inform internal and external stakeholders, including states, the public, and Congress, of the basis for the agency’s determinations that approved expenditure authorities are likely to promote Medicaid objectives. 3. Take steps to ensure that Medicaid demonstration approval documentation consistently provides assurances—such as through claiming protocols or the application template—that states will avoid duplicative spending by offsetting as appropriate all other federal revenues received when claiming federal Medicaid matching funds.

Agency Comments and Our Evaluation

We received written comments on a draft of this report from HHS, which are reprinted in appendix VI. In its response, HHS partially concurred with one of the recommendations and concurred with the other two recommendations.

In responding to our recommendation that HHS issue criteria for assessing whether section 1115 expenditure authorities are likely to promote Medicaid objectives, HHS said that it partially concurred. HHS said that all section 1115 demonstrations are reviewed against “general criteria” to determine whether Medicaid objectives are met, including whether the demonstration will (1) increase and strengthen coverage of low-income individuals; (2) increase access to, stabilize, and strengthen providers and provider networks available to serve Medicaid and low-income populations; (3) improve health outcomes for Medicaid and other low-income populations; and (4) increase the efficiency and quality of care for Medicaid and other low-income populations through initiatives to transform service delivery networks. HHS also said that at times, it has issued what it considered to be criteria for certain types of demonstrations, such as those focused on substance-use delivery system reform or on services to individuals with HIV, through an informational bulletin or State Medicaid Director’s Letter. HHS committed to taking additional steps in the future to require that demonstration approval documents more clearly articulate how section 1115 authority is being used to help states address evolving trends or needs in their Medicaid programs.

HHS’s response was silent, however, as to whether it planned to issue written guidance on the general criteria noted in its response. Further, we maintain that the general criteria are not sufficiently specific to allow a clear understanding of what HHS considers to be approvable Medicaid purposes. During the course of our review, HHS officials said that it is not in the agency’s best interest to issue guidelines that might limit the agency’s flexibility in determining which demonstrations promoted Medicaid objectives. Based on HHS’s response to our recommendation, we remain concerned that the agency has not altered its position. Even if HHS were planning to issue the four criteria noted in its response, they are no more specific than the broad policy approaches currently described on HHS’s website and therefore would be insufficient to inform stakeholders of the agency’s interpretation of its section 1115 authority. For example, although each of HHS’s four general criteria relates to serving low-income or Medicaid populations, HHS does not define low- income or what it means to serve these individuals. Several state programs that were approved for Medicaid spending that we reviewed appeared, on their face, to be only tangentially related to improving health coverage for low-income individuals. Similarly, investments in broad delivery system reforms that were approved for Medicaid spending would seemingly benefit all patients served by these systems, not necessarily only or mostly those with low incomes. Unless HHS issues written guidance that more precisely explains how such demonstrations must relate to serving low-income and Medicaid populations, the rationale for the agency’s approvals of expenditure authorities that can amount to billions of dollars in federal funding is not transparent.

HHS concurred with our other two recommendations, saying that it will (1) ensure that all future section 1115 demonstration approval documents (including those for new demonstrations, renewals, and amendments) will identify how each approved expenditure authority promotes Medicaid objectives, and (2) take steps to ensure that section 1115 demonstration approval documentation for state programs, uncompensated care pools, and incentive pools consistently provides assurances that states will avoid duplication of federal spending. HHS also provided technical comments, which we incorporated as appropriate.

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

Appendix I: Summary of Types of Expenditure Authorities Approved from June 2012 through October 2013

Table 5 summarizes Department of Health and Human Services (HHS) approvals of expenditure authorities included in demonstrations approved or modified between June 2012 and mid-October 2013. Approvals were for new demonstrations, extensions of demonstrations due to expire, and amendments that modified the expenditure authorities of ongoing demonstrations. This information includes the type of approval(s) received, the demonstrations’ names and approval periods, and the types of approved expenditure authorities for coverage-related and non- coverage-related purposes. Expenditure authorities for coverage included expansion to populations such as low-income adults, the addition of benefits including home- and community-based services (HCBS), and premium assistance used to purchase health insurance. Non-coverage- related expenditure authorities included funding for state programs, funding pools, and other purposes.

Appendix I: Summary of Types of Expenditure Authorities Approved from June 2012 through October 2013 State (Type of approval received during review period) Arkansas (New)

X Appendix I: Summary of Types of Expenditure Authorities Approved from June 2012 through October 2013 State (Type of approval received during review period) Illinois (New)

X Appendix I: Summary of Types of Expenditure Authorities Approved from June 2012 through October 2013 State (Type of approval received during review period) Missouri (Extension)

Appendix I: Summary of Types of Expenditure Authorities Approved from June 2012 through October 2013 We identified several “other” expenditure authorities HHS approved during this period not related to other categories, including payments to managed care contractors that received certain exceptions from otherwise applicable Medicaid requirements See app. III for more information on these “other” expenditure authorities.

The demonstration approval period shown is inclusive of the approval periods for two demonstrations. The approval period for New York’s Partnership Plan demonstration was August 1, 2011, through December 31, 2014. The approval period for the state’s Federal State Health Reform Partnership demonstration was March 31, 2011, through March 31, 2014.

Table 6 below shows expenditure authorities approved or modified by the Department of Health and Human Services (HHS) from June 2010 through mid-October 2013, allowing states to claim federal Medicaid matching funds for premium assistance payments under their section 1115 demonstrations. The table includes expenditure authorities that were newly approved, extended, or amended during this time period. (It does not include any expenditure authorities for premium assistance that may have been approved previously in these or other states and were in effect during this time period.) The table provides information on the effective dates of the expenditure authorities, the type of premium assistance approved, and the populations covered.

Appendix III: Other Expenditure Authorities Approved for Managed Care Organizations and Various State Activities

In addition to expenditure authorities for state programs and funding pool payments, the Department of Health and Human Services (HHS) approved expenditure authorities under section 1115 of the Social Security Act that provided federal Medicaid funds for a variety of other non-coverage-related purposes. Specifically, HHS approved expenditure authorities in several states to make payments to managed care organizations (MCO) that received certain exceptions from otherwise HHS also approved several applicable Medicaid MCO requirements.expenditure authorities for states to claim federal matching funds for specific state activities not related to MCOs.

42 U.S.C. § 11396u-2(a)(4)(A). that promote healthy behaviors earn credits that may be used for approved health-related expenditures.

HHS also approved expenditure authorities for activities unrelated to MCOs. For example, Oklahoma was approved to receive matching funds for expenditures to embed health coaches within practices with a high number of patients with chronic disease or at high risk for poor health outcomes. Health coaches provide beneficiaries with a comprehensive initial evaluation, plan of care, educational materials, referrals, and self- management support. Missouri received approval allowing the state to continue to receive federal matching funds for expenditures incurred by a regional health commission for administrative activities related to the assessment of safety net benefits for the community.

Appendix IV: Duration of Expenditure Authorities for Some State Programs

The Department of Health and Human Services’ (HHS) approvals of expenditure authorities for state programs previously financed by the states have been longstanding in some cases, particularly in cases when demonstrations were extended or amended. Table 7 shows the duration of some of the demonstrations that received HHS approval to extend expenditure authorities for state programs during our review period.

Appendix V: Total Funding Pool Spending Limits in Selected States

Table 8 summarizes the total funding pool spending limits for the 11 states that received approval from the Department of Health and Human Services (HHS) for expenditure authorities for funding pools included in demonstrations approved or modified during our review period, between June 2012 and mid-October 2013. For states in our scope due to modifications to ongoing funding pools, other funding pools may have been in place. This table shows total approved spending limits for all funding pools in those states’ demonstrations, including those that were established before our review period. Funding pools were primarily for uncompensated care costs and incentive payments to carry out delivery system reform initiatives. Some states received approval for funding pools for other purposes—for example, additional supplemental payments in New Jersey and infrastructure payments for a specialty provider’s overhead costs in Missouri.

Appendix VI: Comments from the Department of Health and Human Services

Appendix VII: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact name above, Catina Bradley, Assistant Director; Christine Davis; Anne Hopewell; Shirin Hormozi; Linda McIver; Perry Parsons; Roseanne Price; and Hemi Tewarson made key contributions to this report.