Medicaid: CMS Oversight of Provider Payments Is Hampered by Limited Data and Unclear Policy
Released: 2015-05-11T00:00:00

Letter

Background

Within broad federal requirements under Title XIX of the Social Security Act, each state administers and operates its Medicaid program in accordance with a state Medicaid plan, which must be approved by CMS. A state Medicaid plan (1) describes the groups of individuals to be covered and the methods for calculating payments to providers; (2) establishes criteria and requirements for providers to be eligible to receive payments; (3) describes the categories of services covered, such as inpatient hospital services, nursing facility services, and physician services; and (4) must be approved by CMS in order for the state to receive matching funds for the federal share of Medicaid payments it makes. Any changes a state wishes to make in its Medicaid plan, such as establishing new Medicaid payments to providers or changing methodologies for determining provider payment rates, must be submitted to CMS for review and approval as a state plan amendment.

Federal matching funds are available to states for different types of payments that states make. For regular, claims-based payments made directly to providers that have submitted bills for services rendered, states pay the providers based on established payment rates for the services provided. For supplemental payments, states generally make monthly, quarterly, or annual lump sum payments or may include the payments as adjustments to regular, claims-based payments. Supplemental payments include Disproportionate Share Hospital (DSH) payments, which states are required by federal law to make to certain hospitals. These payments are designed to help offset these hospitals’ uncompensated care costs for serving large numbers of Medicaid and uninsured low-income individuals. Many states also make other supplemental payments that are not required under federal law. These payments include Medicaid UPL supplemental payments, which are Medicaid payments that are above the regular Medicaid payments but within the UPL, defined as the estimated amount that Medicare would pay for comparable services. UPL supplemental payments, like regular claims-based payments, must be made for allowable Medicaid expenditures and must comply with applicable federal requirements. Regular and UPL supplemental payments are not limited to providers’ costs of delivering Medicaid services; however, as Medicaid payments, they are intended to pay for Medicaid-covered services provided to Medicaid beneficiaries and must by law be economical and efficient. States may also make other supplemental payments to hospitals, nursing facilities, and other providers authorized under Medicaid demonstrations. (See app. II for information on our past concerns about Medicaid supplemental payments.)

The Medicaid UPL is a ceiling on the amount of federal matching funds a state may receive for Medicaid payments; it is based on the amount that Medicare would pay for similar services. Because states’ regular payments are often lower than what Medicare would pay for comparable services, states are able to make UPL supplemental payments, which are separate from and in addition to regular payments, and the federal government will share in those payments up to the maximum amount allowed under the UPL. (See fig. 1.)

The UPL is not a provider-specific limit but instead is applied on an aggregate basis for certain provider ownership types and categories of services. Specifically, the UPL is applied on an aggregate basis to the three ownership types—local government, state government, and private. Separate UPLs exist for providers of inpatient hospital services, outpatient hospital services, nursing facility services, and physician and other practitioner services, and for services provided in intermediate care facilities for the developmentally disabled (ICF/DD).

To obtain federal funding for both regular and supplemental payments, states submit their estimated aggregate expenditures by type of service to CMS each quarter for an upcoming quarter. After CMS has approved the estimate, it makes federal funds available to the state for the purpose of making Medicaid payments during the upcoming quarter. States typically make Medicaid payments to providers with a combination of nonfederal funds and federal funds. Within 30 days of the end of each quarter, states are required to submit their actual expenditures for the quarter on the standardized form CMS-64. CMS uses the CMS-64 data, which aggregates states’ expenditures, to reconcile actual expenditures with states’ estimates.

CMS Medicaid Expenditure Reports Include Data on Provider Ownership for 10 Percent of Payments Made in 2011

CMS-64 expenditure reports on Medicaid payments show provider ownership for 10 percent of total Medicaid payments made in federal fiscal year 2011. Each quarter, states submit their total Medicaid payments on the CMS-64 expenditure reports by more than 70 categories of service. The expenditure reports capture aggregate state expenditures and are not intended to collect provider-specific payment information. Provider ownership information is reported for 6 categories of service for UPL supplemental payments and 2 categories of service for regular payments, accounting for $40 billion, or 10 percent, of the $414 billion in Medicaid payments in federal fiscal year 2011.CMS-64 expenditure data that is reported by provider ownership, payments to government providers accounted for $21 billion, or 52 percent, and payments to private providers accounted for the remaining $19 billion, or 48 percent. (See fig. 2.) Because states report their CMS-64 expenditure data at an aggregate state level and not by provider or by claim, we could not determine the extent to which the difference in payments to government providers versus private providers was due to a higher volume of services provided or a larger number of providers in the ownership group.

In Three Selected States, Insufficient Data Precluded a Comprehensive Assessment of Medicaid Payments, and Focused Comparisons Possible In Two States Were Inconclusive

Assessing Medicaid payments to individual hospitals was hampered by insufficient data. In two states with reliable data, Illinois and New York, our estimates of average daily payments made to government and private hospitals showed inconclusive trends, but also identified that a small number of government hospitals were receiving high payments that warrant oversight. For example, some selected hospitals in each of these states received Medicaid payments in excess of total operating costs.

A Comprehensive Assessment of Medicaid Payments to Individual Hospitals in Selected States Was Precluded by Inaccurate and Incomplete Data

Our assessment of Medicaid payments to individual hospitals in three selected states—California, Illinois, and New York—was hampered by inaccurate and incomplete state data on Medicaid payments and CMS claims data on Medicaid payments and days of service. States must capture and report payment data to CMS, but the data needed to compare payments by individual provider and provider ownership are not specifically required. Despite extensive work we conducted in California to obtain and analyze Medicaid claims and UPL supplemental payment data, we were unable to compare individual hospitals’ daily payments by hospital ownership for inpatient hospital services. This was because California lacked reliable data to enable an assessment of Medicaid payments made to individual hospitals. The data California provided on its Medicaid supplemental payments and hospital ownership, neither of which are reported in MSIS, were not usable due to inconsistent hospital identification numbers—including state identification numbers and National Provider Identifiers (NPI)different versions of the data, and missing hospital ownership information. —payment amounts that changed in For example, the California Medicaid officials provided their supplemental payments in over 20 different spreadsheets, each of which represented a different type of payment and included, by hospital, a hospital identification number and the payment amount. However, the spreadsheets used different types of hospital identification numbers among different spreadsheets, and the California officials were unable to provide a crosswalk of the different identification numbers. As a result, hospital payments listed on multiple spreadsheets could not be matched to determine how much in supplemental payments the state was paying the individual hospitals, and could not be matched with the MSIS claims data by hospital.

Although data provided by Illinois and New York were sufficiently reliable for assessing certain Medicaid payments to individual providers for inpatient hospital services, both states had Medicaid payment gaps that precluded assessment of all Medicaid payments the states made. In Illinois, 3 of the 21 local government hospitals in the state received large supplemental Medicaid payments that are based on criteria outlined in the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act These payments, which of 2000 (BIPA)—referred to as BIPA payments.Illinois makes annually, are significant—totaling nearly $750 million annually. Because these BIPA payments are not for specified Medicaid services or related to the cost of providing Medicaid services, we did not include them when determining daily payments. Similarly, states are not required to report DSH supplemental payments by the uncompensated care costs related to Medicaid patients versus uninsured patients. Therefore, we did not include them when determining daily payments. Illinois, in state fiscal year 2011, paid $335 million in DSH supplemental payments, of which $304 million was paid to 3 local government hospitals, $27 million was paid to the state’s 1 state government hospital, and $4 million was paid to 38 private hospitals. New York, in state fiscal year 2011, paid over $2 billion in these payments, of which over $1 billion was paid to 20 local government hospitals, $250 million was paid to 5 state government hospitals, and $670 million was paid to 158 private hospitals. Because it was unclear what portion of these payments was related to the cost of providing uncompensated care related to Medicaid patients versus uninsured patients, we did not include them when determining Medicaid payments by hospital ownership.

In addition, claims data for both Illinois and New York could not be used for analyzing payments to individual providers for outpatient hospital, nursing facility, and ICF/DD services. For outpatient hospital services, available claims data did not provide sufficient information to determine the number of outpatient visits. Some of the outpatient claims were for bundled services—that is, services that were provided over a series of visits—and, therefore, we could not calculate outpatient payments on a per visit basis. For both nursing facility and ICF/DD services, available claims data were not reliable for determining the number of days of service provided. Adjustment claims for these services only reported adjustments to the payments and did not indicate the days of service that were similarly affected. As a result, we could not determine an accurate number of days of service for each provider and, therefore, could not calculate daily payments.

Illinois Government and Private Hospitals’ Average Daily Inpatient Medicaid Payments Were Comparable in 2011, but Individual Hospitals’ Daily Payments Varied Widely, and One Government Hospital Received Payments That Exceeded Its Total Operating Costs

For inpatient services provided by 193 hospitals in Illinois in state fiscal year 2011, government hospitals’ and private hospitals’ average daily payments were comparable. In comparing these regular and UPL supplemental payments by hospital ownership, we adjusted the regular payments for differences in the conditions of the patients treated by the hospitals, commonly referred to as “case-mix” adjustment.daily payment was highest for the state government hospital at $2,666, compared to $2,639 for the local government hospitals, and $2,620 for private hospitals.

While government and private hospitals had comparable average daily payments for inpatient services, the daily payments for the individual hospitals within the ownership groups were wide ranging and varied. For example, the daily payments for local government hospitals ranged from $552 to $9,822, compared to $754 to $11,239 for private hospitals. (See fig. 4.) These varying daily payments make it difficult to draw conclusions about payment differences by hospital ownership, but helped in the identification of individual hospitals with significantly higher daily payments compared to other hospitals. (See app. I for information on the methodology used for comparing average daily payments for inpatient hospital services in Illinois by hospital ownership, and app. IV for more detailed information on Illinois’s Medicaid payments for inpatient hospital services by hospital ownership, including the average, median, and range of the daily payments.)

When comparing the Medicaid inpatient payments—regular and UPL supplemental payments—to the costs of providing those services, estimated using cost reports prepared by hospitals, for hospitals with the highest daily payments, we found that six of the seven selected hospitals had total Medicaid inpatient payments that exceeded those hospitals’ total The three local government hospitals costs of providing these services.and three private hospitals had Medicaid inpatient hospital payments that exceeded costs, ranging from about $273,000 to about $18 million over costs. The one state hospital had payments that were $4 million less than costs, with $124 million in payments compared to $128 million in costs. (See fig. 5.)

Illinois Medicaid officials attributed the variation in the extent to which the inpatient payments exceeded costs to various factors. For example, except for the local government hospital with payments about $655,000 more than costs, the hospitals that had payments in excess of costs received regular Medicaid inpatient payments that were predetermined rates based on a patient’s diagnosis—a Diagnosis Related Group system—and were not paid on costs. The Diagnosis Related Group payment method is intended to provide incentives for hospitals to lower costs. In addition, the officials told us that these hospitals, including the local government hospital, received UPL supplemental payments that were calculated based on 2005 data—a year in which the hospitals provided a higher volume of Medicaid inpatient services, which resulted in larger UPL supplemental payments.

In addition, for the selected hospitals in Illinois, we also compared Medicaid payments and other supplemental payments to the hospitals’ total operating costs for all services and all patients and found that one of the local government hospitals received Medicaid payments that exceeded the hospital’s total operating costs. For this comparison, in addition to regular inpatient and inpatient UPL supplemental patients, we included DSH supplemental payments and BIPA Medicaid supplemental payments. We found that these Medicaid payments to this hospital totaled $907 million, while total operating costs were $540 million. The hospital’s BIPA Medicaid supplemental payments were the cause of payments exceeding total operating costs. According to the Illinois officials, the BIPA Medicaid supplemental payments are payments that the state is authorized to make under federal law. (See app. I for information on the methodology used for comparing the selected Illinois hospitals’ Medicaid payments for inpatient services to the costs of providing those services and to total operating costs, and app. V for more detailed information on the hospitals’ Medicaid payments for inpatient services, the costs of providing those services, and total operating costs.)

New York Government Hospitals Received Higher Average Daily Medicaid Inpatient Payments than Private Hospitals, but Individual Hospital’s Daily Payments Varied Widely, and Two Government Hospitals Received Payments That Greatly Exceeded Their Total Operating Costs

For inpatient services provided by 201 hospitals in New York in state fiscal year 2011, government hospitals had higher average daily payments than private hospitals. Local government hospitals had the highest average daily payment for the case-mix-adjusted regular and UPL supplemental payments at $1,514, compared to $933 for private hospitals. However, the local government hospitals’ high average daily payment was due primarily to two hospitals receiving a total of $416 million in UPL supplemental payments, inflating the average payment for all local government hospitals.

The individual hospitals’ daily payments varied widely within each of the hospital ownership groups. For example, the local government hospitals’ daily payments ranged from $198 to $9,176, compared to $144 to $3,413 for private hospitals.difficult to draw conclusions about payment differences by hospital ownership, but helped in identifying individual hospitals with significantly higher daily payments compared to other hospitals. According to New York officials, these daily payments may have varied because of a variety of factors, including the geographic location of a hospital. (See app. I for information on the methodology used for comparing average daily payments for inpatient hospital services in New York by hospital ownership, and app. VI for more detailed information on the state’s Medicaid payments for inpatient hospital services by hospital ownership, including the average, median, and range of the daily payments.) (See fig. 6.) The varying daily payments make it Any redistributed UPL supplemental payments these 10 It was not within the scope of our review to examine how the payments returned to the corporation were used, the extent to which they were redistributed among the corporation’s hospitals or other facilities, or whether the redistribution of excessive UPL payments is consistent with federal DSH limits or CMS policy regarding provider retention of Medicaid payments. However, at the conclusion of this review we brought these practices to the attention of CMS officials for their consideration. Officials agreed the payment arrangement may warrant further review.

CMS Lacks Information and a Policy and Process to Oversee Medicaid Payments to Individual Providers

CMS’s oversight of Medicaid payments to individual hospitals and other institutional providers is limited. The agency does not collect provider- specific payment and ownership information and lacks a policy and standard process for determining whether Medicaid payments to individual providers are economical and efficient. As a result, excessive state payments to individual providers may not be identified or examined by CMS.

Information Needed to Oversee Medicaid Payments to Government and Private Providers Is Lacking

CMS does not collect sufficient information on payments to enable it to assess payments for individual providers, which would allow the agency to ensure that payments are appropriately spent for Medicaid purposes. CMS collects information on states’ Medicaid payments from its review of state plan amendment proposals and two payment data systems. However, CMS does not collect comprehensive information on provider- specific payments through these sources. As a result, it cannot identify or assess total Medicaid payments received by individual providers and the extent to which they differ among providers for similar services, and cannot review significant differences in payments among providers. In addition, CMS cannot determine whether payments to individual providers are consistent with the Medicaid criteria of efficiency and economy. Federal agencies should collect accurate and complete data to monitor programs they oversee.

Information describing proposed Medicaid payments and related methodologies that states submit to CMS is not adequate to provide data for assessing and overseeing Medicaid payments, including those to government providers. CMS must review and approve state plan amendments before a state can make payments and claim the federal share of the payments. However, according to CMS officials, while states lay out criteria for who qualifies for payment and how payments are calculated in their state plan amendments, they are not required to offer more details, such as information on which providers will receive payments. In addition, because CMS asks states to submit comprehensive descriptions of their payment methodologies, state plan amendment language describing a state’s methodology for determining Medicaid payments can be complex and technical, without offering specific details on the payments that will result from the payment methods. As an example, language in a New York state plan amendment for state fiscal year 2011 UPL supplemental payments for inpatient services to local government hospitals identified the total amount authorized to be paid in UPL supplemental payments, but did not identify the amounts paid to individual hospitals.cannot rely solely on reviews of state plan amendments to assess whether payments to specific providers are meeting Medicaid criteria of economy and efficiency.

Lacking these details, CMS CMS’s two ways of collecting Medicaid payment information—the Medicaid Statistical Information System (MSIS), a data collection system, and the CMS-64, a quarterly expense report used to provide federal matching funds for state Medicaid expenditures—do not collect complete information on payments to government and private providers. MSIS is CMS’s national eligibility and claims data system and is the agency’s only source of provider-specific payment data reported by states. However, states are not required to report in MSIS provider ownership information or UPL supplemental payments that are not paid on claims. As a result, analyzing payments by provider ownership groups is not possible, and assessing total payments by provider is complicated by the fact that the UPL supplemental payments, which can be significant, are not reported in MSIS. For example, according to state data, in state fiscal year 2011, Illinois and New York made about $2 billion and $3 billion, respectively, in UPL supplemental payments that were not reported in MSIS. CMS-64 was not designed to capture provider-specific information; it provides aggregate payment amounts and does not have provider-specific payment or ownership information. As mentioned previously, it captures total payments by provider ownership for a few payment types, representing 10 percent of total Medicaid payments made in federal fiscal year 2011.

More recently, another source of provider-specific payment information, including UPL supplemental payments, became available for certain providers, but it too provides limited information. Beginning in 2010, states have been required to submit audited reports annually on any hospital receiving DSH supplemental payments. Information that states are required to report separately for each DSH hospital includes the hospital’s Medicaid costs, and all Medicaid payments—regular, DSH supplemental, and UPL supplemental. However, this reporting is not required for hospitals that are not eligible to receive DSH supplemental payments.

Recognizing the need for better data from the states, CMS began implementing two initiatives in 2013. The first initiative, to improve its oversight of the Medicaid UPL and state UPL supplemental payments, requires additional state reporting, but gaps remain. Beginning in June 2013, states were required to annually submit to CMS documentation of their Medicaid UPL calculations and provider-specific payment information. Previously, CMS had performed reviews of UPL calculations only when a state submitted a proposal to revise existing payments or add new payments in its state plan. Despite the new guidance and new reporting requirements, data gaps and challenges remain that limit CMS’s ability to oversee payments. CMS has not specified a standardized data reporting format, including the key data states should report on providers and payments, such as NPIs for each provider and actual supplemental payments. As a result, some states may not report actual supplemental payments they make and, without NPIs, CMS is currently unable to merge UPL supplemental payments with regular claims-based payment data in MSIS.

CMS’s second initiative, to improve MSIS, is intended to collect provider- specific ownership and supplemental payment information. CMS is developing the Transformed Medicaid Statistical Information System (T- MSIS)—an enhanced Medicaid data system—to replace MSIS. T-MSIS will require states to report additional information to CMS that is not currently collected in MSIS, including provider-specific information on The agency supplemental payments received and provider ownership. has cited T-MSIS as a key tool for providing the federal government and states with better information with which to manage and monitor Medicaid program integrity, including identifying waste, fraud, and abuse.However, there is uncertainty about when T-MSIS will be operational. In December 2014, CMS officials reported that the agency was still working on stabilizing its data systems to begin accepting state claims data through T-MSIS as states pass testing and are found by CMS to be ready to transition to T-MSIS. In December 2014, 18 states were in the final testing phases, and, depending on the nature of remaining issues with their data, these states could be ready for full implementation in 2 months. However, officials were uncertain when all states would be capable of reporting claims and payment information via T-MSIS. In addition, it is uncertain when states will be able to report all of the new data required under T-MSIS. According to CMS officials, some states have had problems reporting some of this information, particularly provider ownership information. Officials were also uncertain about whether all of the issues we encountered with the existing claims data submitted by states through MSIS would be addressed when T-MSIS was fully operational. For example, when we reported that some states were reporting state-assigned provider numbers rather than NPIs, reporting multiple NPIs for one provider, or reporting incorrect and inaccurate NPIs, officials said that under T-MSIS there will be a cross-walk between provider NPIs and state-issued provider identification numbers that states use in processing claims. However, beyond looking for obvious errors in formatting of the NPI numbers, such as incorrect values or provider numbers that are too short or too long, CMS will not identify erroneous NPI numbers. Officials said errors involving providers with multiple NPIs or NPIs assigned to the wrong provider are identified when the data are analyzed for oversight and monitoring purposes.

In addition to these two initiatives, CMS officials told us they are also considering ways to improve data for overseeing payments at the provider level. As part of this effort, in May 2014, CMS contracted a study to, among other things, (1) analyze documentation on regular and UPL supplemental payments that states began submitting in 2013 to determine opportunities for improvement in CMS oversight; (2) store that information in a standardized format to enable analysis to be performed at both the aggregate and the provider-specific levels; and (3) assess the utility of T-MSIS data for the purpose of assisting CMS oversight of Medicaid UPL payments. The officials expect to receive the first report from the study in early 2015, and based on this report, will determine any additional actions the agency will take to enhance the information it collects for oversight purposes.

CMS’s Oversight of Medicaid Payments to Individual Providers Is Limited Because CMS Lacks a Policy and Process for Assessing Whether Payments to Individual Providers Are Economical and Efficient

CMS cannot ensure that Medicaid payments to individual providers are economical and efficient because the agency does not have a standard policy delineating criteria for when payments made to individual providers are economical or efficient, nor does it have a process to identify payments to individual providers that appear questionable. Instead, the agency reviews payment methodologies, relies on states to provide justification for unclear methodologies, and follows up on payments that are identified as questionable by oversight reviews conducted by oversight agencies, such as HHS’s Office of Inspector General. However, even when CMS identifies cases of payments to individual providers for further review, it does not have established criteria for determining whether these payments are economical and efficient. According to officials, to determine state compliance with the statutory requirement that Medicaid payments are economical and efficient,on ensuring that states comply with Medicaid’s UPL regulations. The UPL regulations establish a ceiling on the amount of federal matching funds a state can claim. The UPL, which is based on how much Medicare would pay for the same service, is an aggregate limit that applies to groups of CMS primarily relies providers based on a category of service and provider ownership.the UPL limits payments to a group of providers, it does not limit the amount of payment a particular provider can receive, provided the aggregate payment amount to the group does not exceed the UPL.

CMS’s focus on the aggregate UPL hinders its ability to determine whether payments to individual providers are economical and efficient, as states can comply with an aggregate UPL but target UPL supplemental payments to a small number of providers. To illustrate, CMS reviewed and approved a state plan amendment authorizing the state of New York to make more than $400 million in inpatient hospital UPL supplemental payments to qualifying local government hospitals. The UPL supplemental payment amount represented the difference between regular Medicaid payments to the 21 local government hospitals subject to the UPL and what Medicare would have paid for inpatient services to these hospitals in the aggregate. However, we found in July 2014 that the aggregate UPL supplemental payments the state estimated it could make based on the workload of all 21 local government hospitals in New York, In approving the state were actually made to only 2 of the 21 hospitals. plan amendment authorizing the UPL supplemental payment, CMS determined that the payment would not exceed the applicable aggregate UPL. The state plan amendment did not specify the number or names of hospitals that were eligible for payments under the amendment, and CMS did not obtain information on which of the 21 local government hospitals would receive UPL supplemental payments. The state submitted hospital- specific information showing the difference between each hospital’s estimated regular Medicaid payments and the UPL, which is what Medicare would pay for comparable services.information to calculate the aggregate UPL for the local government hospitals. Figure 8 compares the difference between regular payments The state used this and the UPL that New York estimated for each hospital to the actual amounts of UPL supplemental payments made.

In addition, we found a similar concentration of UPL supplemental payments for outpatient hospital services made to local government hospitals in state fiscal year 2011. Specifically, CMS approved New York to make about $154 million in UPL supplemental payments for outpatient hospital services for the 21 local government hospitals. Similar to the case for UPL supplemental payments for inpatient services, the state made a UPL supplemental payment for outpatient hospital services to only one local government hospital.

CMS has recently taken actions to reduce the supplemental payment amounts paid to the three hospitals, indicating that the payments were excessive, but had not, as of January 2015, made a formal determination as to what payment amount would have been appropriate for the local government hospitals. According to CMS officials, because their reviews focus on the aggregate UPL, they were not aware of the distribution of these payments to specific hospitals. However, after we informed them of these payments, they initiated a review of the payments and, according to CMS officials, were in the process of working with the state to lower future payments the state would make to the three local government hospitals identified as receiving large supplemental payments in this review. As of January 2015, CMS had not provided details on the amount of payment reductions for the three hospitals. CMS officials told us they recognized the need for a strategy to oversee Medicaid payments to individual providers and the agency was considering ways to improve the agency’s oversight of Medicaid payments and payment limits, including how to better assess payments to individual providers.

Conclusions

Medicaid represents significant expenditures for the federal government and states and is the source of health care for tens of millions of vulnerable individuals. Its long-term sustainability is critical, and will require effective federal oversight to ensure that Medicaid payments are economical and efficient, and are made for covered Medicaid items and services. The longstanding concerns we have raised about some states’ excessively large Medicaid payments to certain institutional providers continue. Further, our analysis showing the wide ranges in hospitals’ average daily payments, and high payments over costs to certain government and private hospitals, raises further questions about federal oversight of states’ payments to individual institutional providers, both government and private. Provider payments that are tens of millions of dollars, and in some cases hundreds of millions of dollars, greater than providers’ costs raise questions about whether such payments are consistent with economy and efficiency as required by law and the extent to which the payments are ultimately used for Medicaid purposes. Medicaid payments that exceed the total costs of operating the hospital raise, even further, questions as to their appropriateness. Moreover, the fact that CMS is largely unaware of the extent to which state Medicaid payments exceed Medicaid costs to certain providers highlights the shortcoming of its current approach to overseeing state Medicaid payments. To oversee state Medicaid payments to individual providers, CMS needs accurate and complete provider payment data, as well as a policy and process for reviewing payments made to individual providers. While CMS has taken some steps to improve payment data it receives from the states, it does not have the comprehensive data for oversight, and future data improvements are uncertain. In addition, CMS does not have a policy and process for assessing the economy and efficiency of payments at the provider level. Without good data on payments to individual providers, a policy and criteria for assessing whether the payments are economical and efficient, and a process for reviewing such payments, the federal government could be paying states hundreds of millions, or billions, more than what is appropriate.

Recommendations for Executive Action

To improve CMS’s oversight of Medicaid payments, we recommend that the Administrator of CMS take the following three actions:

Take steps to ensure that states report accurate provider-specific payment data that include accurate unique national provider identifiers (NPI).

Develop a policy establishing criteria for when such payments at the provider level are economical and efficient.

Once criteria are developed, develop a process for identifying and reviewing payments to individual providers in order to determine whether they are economical and efficient.

To ensure the appropriateness of Medicaid payments to providers in New York, we recommend that the Administrator of CMS take the following fourth action: expedite the formal determination of the appropriateness of New York’s payment arrangements and ensure future payments to local government hospitals are consistent with all Medicaid requirements.

Agency Comments and Our Evaluation

We provided a draft of this report to HHS for comment. In its written response, HHS concurred with our recommendations and noted efforts to address them. HHS stated that it is evaluating ways to improve its oversight, including gathering information from states to better inform future policies. HHS noted that information being collected will better inform the agency regarding efforts to establish criteria, policies, and procedures to evaluate whether payments at the provider level are economical and efficient.

HHS comments are reprinted in appendix VIII. HHS also provided technical comments, which we incorporated as appropriate.

As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the Secretary of Health and Human Services, the Administrator of the Centers for Medicare & Medicaid Services, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov.

If you or your 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 this report. Major contributors to this report are listed in appendix IX.

Appendix I: Scope and Methodology for Analyzing Medicaid Payments and Hospital Costs

To determine what the Centers for Medicare & Medicaid Services (CMS) Medicaid expenditure reports include about payments by provider ownership nationwide, we analyzed CMS’s quarterly Medicaid expenditure reports for federal fiscal year 2011—the most recent year for which complete data were available at the time of our analysis. To determine, for selected states, how state Medicaid payments to government hospitals compare to state Medicaid payments to private hospitals, we used federal Medicaid claims data and data provided by the states. To determine, in the selected states, how the state Medicaid payments to selected hospitals compare to the hospitals’ Medicaid costs and to hospitals’ total operating costs, we used the federal Medicaid claims data and data and Medicaid cost reports provided by the states.

Methodology for Analyzing Medicaid Expenditure Reports

To examine what information CMS Medicaid expenditure reports include about payments by provider ownership nationwide, we used the quarterly Medicaid expenditure reports—referred to as the CMS-64—that states use to report their Medicaid expenditures for purposes of receiving federal matching funds. We determined based on the expenditure reports that states reported payments by provider ownership for six categories of service for upper payment limit (UPL) supplemental payments and two categories of service for regular payments. The six categories of service for UPL supplemental payments reported by provider ownership include (1) inpatient hospital, (2) outpatient hospital, (3) nursing facility, (4) physician and surgical, (5) other practitioner, and (6) intermediate care facilities for the developmentally disabled (ICF/DD). The two categories of service for regular payments that are reported by provider ownership include (1) ICF/DD and (2) school-based services.

For each state, we compiled payments for the categories of service reported by provider ownership that were provided in federal fiscal year 2011—the most recent year for which complete data were available at the time of our analysis—by excluding those payments for services that were reported in federal fiscal year 2011 but were provided in prior years, and including payments for services provided in federal fiscal year 2011 but were reported in federal fiscal years 2012 or 2013. We used two main CMS-64 expenditure reports to compile this information. One report—the CMS-64 Base Report—includes payments for services provided in federal fiscal year 2011, as well as payments and adjustments for prior years. It does not include payments or payment adjustments for services provided in federal fiscal year 2011 that were reported in federal fiscal years 2012 or 2013. The other key report—the Financial Management Report Net Expenditure Reports—includes payments for services provided in federal fiscal year 2011 and includes payments made in 2011 that were for prior years. It also includes payments or payment adjustments for services provided in federal fiscal year 2011 that were reported in federal fiscal years 2012 or 2013. By using these two reports in combination, we determined total payments for services provided in federal fiscal year 2011 for the categories of service reported by provider ownership. For these six categories of service for UPL supplemental payments, we used more-detailed feeder forms for the two reports, which the states use to report the UPL supplemental payments by provider ownership.

To assess the reliability of the CMS expenditure reports, we conducted interviews with CMS officials on how the agency uses the data and any known data reliability issues, reviewed related documentation, and conducted logic tests on the expenditure data. We determined that these data were sufficiently reliable for the purposes of our report. The results of this analysis were limited, however, in that states report their CMS-64 expenditure data at an aggregate state level and not by provider or by claim. Therefore, we could not determine the extent to which the difference in payments to government providers versus private providers was due to a higher volume of services provided or a larger number of providers in the ownership group.

Methodology for Comparing Medicaid Payments by Provider Ownership in Selected States

To determine how, in selected states, state Medicaid payments to government hospitals compare to state Medicaid payments to private hospitals, we selected a nongeneralizable sample of three states— California, Illinois, and New York. We selected these states based on the following criteria: having large Medicaid programs as determined by spending for Medicaid services, making large amounts of certain supplemental Medicaid payments, geographic diversity.

We determined that for California the data needed for our analysis were not reliable and, therefore, we could not compare the state’s payments by provider ownership. For Illinois and New York we analyzed Medicaid payments for inpatient services provided in state fiscal year 2011 by three hospital ownership groups—local government, state government, and private. We analyzed payments for state fiscal year 2011 because it was the most recent year for which data on regular, claims-based payments were available.

To compare Medicaid payments by hospital ownership in Illinois and New York, we combined federal inpatient hospital Medicaid claims data from the Medicaid Statistical Information System (MSIS)—the federal system through which states report Medicaid claims—with data provided by the states, which included additional payment data and hospital ownership information not included in MSIS. Specifically,

From MSIS we compiled regular, claims-based payments for inpatient hospital services by identifying the states’ fee-for-service claims for services provided by hospitals, including general acute care, children’s, and cancer hospitals. We excluded psychiatric hospitals, all managed care claims, claims for patients covered by a separate State Children’s Health Insurance Program, and any Medicare “crossover” claims—where Medicare was the primary payer. We used all four quarters of MSIS claims from state fiscal years 2011 and 2012 to identify those claims where the beginning date of service indicated the service was provided in state fiscal year 2011. We adjusted the regular fee-for-service claims to account for differences in the conditions of the patients treated by the hospitals, commonly referred to as “case-mix” adjustment, using case-mix data provided by the states.

From the states we obtained provider-specific UPL supplemental payments and hospital ownership information. In addition, we obtained provider-specific Disproportionate Share Hospital (DSH) supplemental payment amounts from both states, and payment amounts for an additional Medicaid supplemental payment made to certain Illinois hospitals under the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA). However, because it was unclear what portion of DSH supplemental payments was related to the cost of providing Medicaid services and because BIPA payments are not for specified Medicaid services or related to the cost of providing Medicaid services, we did not include these payments when calculating Medicaid payment amounts for government and private hospitals.

We combined the inpatient MSIS payment and day data with the state- provided supplemental payment and hospital ownership data using unique hospital identification numbers, such as the National Provider Identifier (NPI)—a national, unique 10-digit identification number assigned to health care providers. After combining the MSIS and state-provided data, we performed two calculations. First, we calculated a Medicaid daily payment amount for each hospital by dividing the hospital’s total inpatient service payments (regular claims-based payments and UPL supplemental payments) by the total Medicaid days of inpatient services the hospital provided. Second, we calculated an average daily payment amount for each hospital ownership group by summing the daily payment amounts of every hospital in each ownership group and dividing it by the number of hospitals in the ownership group. To ensure that hospitals with very low inpatient days were not skewing the average daily payment amounts, we excluded from this analysis the hospitals that had the lowest 5 percent of inpatient days in state fiscal year 2011.

To assess the reliability of the MSIS claims data and data provided by the states, we reviewed relevant data documents and interviewed agency officials. For the MSIS data, we reviewed the CMS data dictionary and a report on identified issues with the state fiscal year 2011 MSIS claims, conducted logic tests, and interviewed CMS officials on how the data are used by the agency and any known data reliability issues. We also interviewed state Medicaid officials to determine how the states report their MSIS data to CMS. We determined that the MSIS data were reliable for our purposes. For the state-provided data on payments not reported in MSIS and on hospital ownership, we conducted logic tests and interviewed state Medicaid officials. While we determined through our assessments that the data provided by both Illinois and New York were reliable for our purposes, we determined that California’s state-provided data on payments not reported in MSIS and hospital identification numbers were not reliable and, therefore, we could not compare this state’s payments by provider ownership.

Methodology for Comparing Selected Hospitals’ Medicaid Payments to Medicaid Costs for Inpatient Services and to Total Operating Costs

To compare Medicaid payments for inpatient hospital services to Medicaid costs for these services in Illinois and New York, we selected hospitals that had the highest daily payment amounts in each of the three ownership groups in state fiscal year 2011. We selected seven hospitals in Illinois, because the state had only one state government hospital, and nine hospitals in New York.

For each of the selected hospitals in both states, we compared Medicaid payments for inpatient services to Medicaid costs for inpatient services. We calculated the total Medicaid payments for inpatient services—regular and UPL supplemental payments—based on payment data from CMS’s Medicaid claims data and the state-provided data on supplemental payments. For purposes of comparing payments to costs, we did not case-mix-adjust the regular payments for differences in the conditions of the patients treated by the hospitals.

To estimate Medicaid inpatient costs, we used inpatient Medicaid costs that each hospital reported to the state on standard cost reports for state fiscal year 2011. For the selected Illinois hospitals, the inpatient Medicaid costs were reported on the Medicaid cost report. For the selected New York hospitals, we determined inpatient Medicaid costs by first calculating the percentage of each hospital’s total inpatient days that were Medicaid inpatient days and then applying that percentage to the total inpatient service costs to get an initial Medicaid inpatient cost estimate. For the selected hospitals in both states, to account for differences between the days for inpatient services that were reported on the cost reports compared to the days reported in the CMS claims data, we calculated a daily Medicaid cost amount and then multiplied the daily cost amount by the number of days for inpatient services from CMS’s Medicaid claims data. To calculate the daily cost amount, we used the costs and days reported on the Medicaid cost reports; we divided each hospital’s total Medicaid inpatient costs by Medicaid total inpatient days.

For each of the selected hospitals in both Illinois and New York, we also compared Medicaid payments for inpatient services and related supplemental payments to the hospital’s total operating costs for all services and all patients. For the selected hospitals in Illinois, we included in this comparison regular inpatient and inpatient UPL supplemental payments, as well as Disproportionate Share Hospital (DSH) supplemental payments and an additional Medicaid supplemental payment that was authorized under BIPA. For the selected hospitals in New York, we included in this comparison the regular inpatient and inpatient UPL supplemental payments, as well as DSH supplemental payments. For both states, we did not include regular and supplemental payments for outpatient services because we were unable to analyze Medicaid payments for outpatient services. We identified each of the hospitals’ total operating costs for all services and all patients on the hospital’s cost report.and days for Medicaid, and also include total costs for all patients.

The hospitals’ Medicaid cost reports include costs To determine the reliability of the selected Illinois and New York hospitals’ cost reports, we interviewed state Medicaid officials on how the cost data are compiled and used by the agency and whether there were any known data reliability issues. We also compared Medicaid costs and patient days from the selected hospitals’ cost reports from state fiscal year 2009 to the hospital’s DSH report—an independently audited report that states are required to submit to CMS annually for every hospital that receives a DSH supplemental payment—from state fiscal year 2009, the most recent year for which DSH reports were available. Based on these assessments, we determined that the cost report data were sufficiently reliable for our purposes.

Appendix II: Past GAO Concerns about Medicaid Payments

Over the past 20 years, we have reported a number of concerns about Medicaid payments—particularly supplemental payments—that states have made to a small number of providers. Specifically, we have found that by making large supplemental payments to providers that are concurrently supplying funds to the state for the nonfederal share (through such financing arrangements as providers’ taxes and intergovernmental transfers), states have been able to obtain billions of dollars in additional federal matching funds without a commensurate increase in state funds used to finance the nonfederal share. For example, in 2004 and 2005 we found that some states’ excessive payments to a few government providers facilitated the inappropriate In addition, we found shifting of state costs to the federal government.that a lack of uniform guidance on setting Medicaid payment limits and the flexibility given to states under existing federal rules concerning the distribution of supplemental payments allowed states to make large Medicaid payments to a few government providers. We also found that a lack of transparency in how such payments were made allowed for potentially inappropriate Medicaid payments to certain providers and hindered the ability of the Centers for Medicare & Medicaid Services (CMS) to oversee such payments. Table 1 summarizes past issues we have found regarding state Medicaid payments made to providers and actions taken by Congress and CMS to address these concerns.

Partially in response to concerns about excessive supplemental payments to government providers, CMS issued a proposed rule in early 2007 to limit state upper payment limit (UPL) supplemental payments to government providers to their cost of providing Medicaid services. However, concerns were raised that it would harm certain providers, and on May 24, 2007, Congress passed a one-year moratorium on the finalization or implementation of the proposed rule. CMS issued the rule in final form on May 25, 2007, the date on which the President signed the law containing the moratorium. In 2008, a federal district court found the agency’s finalization of the rule violated the moratorium and vacated the rule, and CMS formally rescinded the rule in 2010.

Appendix III: Analysis Results for Medicaid Expenditure Reports

This appendix provides results of our analysis of Centers for Medicare & Medicaid Services (CMS) CMS-64 Medicaid expenditure reports for for payments by provider ownership, both state-by-state and nationwide,federal fiscal year 2011. Specifically, the appendix includes expenditures for Medicaid payments for the categories of service reported by provider ownership, including six categories of service for upper payment limit (UPL) supplemental payments and two categories of service for regular payments.

Table 2 shows total Medicaid expenditures, expenditures reported by provider ownership, the percentage of total expenditures that were reported by provider ownership, expenditures for payments to government providers and private providers, and government provider expenditures and private provider expenditures as a percentage of total expenditures reported by provider ownership.

Tables 3 through 8 show total UPL supplemental payments and the payments and related percentages by three provider ownership groups—local government, state government, and private—for the six categories of service for UPL supplemental payments that are reported by provider ownership.

Tables 9 and 10 show total regular payments and the payments by the three provider ownership groups for the two categories of service for regular payments that are reported by provider ownership.

Appendix IV: Results of Analysis of Medicaid Inpatient Payments for Government Hospitals and Private Hospitals in Illinois

This appendix provides the results of our analysis of Medicaid payments for inpatient services provided in state fiscal year 2011 in Illinois by hospital ownership.

Table 11 shows, by hospital ownership, the Illinois hospitals’ average daily payment, minimum and maximum daily payment, and median daily payment for regular and upper payment limit (UPL) supplemental payments combined.

Table 12 shows, by hospital ownership, Illinois hospitals’ state fiscal year 2011 inpatient service Medicaid regular payments, UPL supplemental payments, Disproportionate Share Hospital supplemental payments, and a third type of Medicaid supplemental payment that three local government hospitals received.

Appendix V: Results of Analysis of Medicaid Payments and Costs for Selected Illinois Hospitals

This appendix provides the results of our analysis comparing seven selected Illinois hospitals’ Medicaid payments for inpatient services to their Medicaid costs for inpatient services and total operating costs in state fiscal year 2011.

Table 13 compares, for each of the seven selected Illinois hospitals, Medicaid payments for inpatient services—including regular payments, upper payment limit (UPL) supplemental payments, and the total regular and UPL supplemental payments—to total estimated Medicaid costs for providing inpatient services in state fiscal year 2011.

Table 14 compares, for the seven selected Illinois hospitals, Medicaid inpatient service payments to total estimated operating costs for all services and all patients for state fiscal year 2011. Medicaid payments include regular and UPL supplemental payments for hospital inpatient services, total Disproportionate Share Hospital supplemental payments, and Medicaid supplemental payments authorized under the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA).

Appendix VI: Results of Analysis of Medicaid Inpatient Payments for Government Hospitals and Private Hospitals in New York

This appendix provides the results of our analysis of Medicaid payments for inpatient services provided in state fiscal year 2011 in New York by hospital ownership.

Table 15 shows, by hospital ownership, the New York hospitals’ average daily payment, minimum and maximum daily payment, and median daily payment for regular and upper payment limit (UPL) supplemental payments combined.

Table 16 shows, by hospital ownership, New York hospitals’ state fiscal year 2011 inpatient service Medicaid regular payments, UPL supplemental payments, and Disproportionate Share Hospital supplemental payments.

Appendix VII: Results of Analysis of Medicaid Payments and Costs for Selected New York Hospitals

This appendix provides the results of our analysis comparing nine selected New York hospitals’ Medicaid payments for inpatient services to their Medicaid costs for inpatient services and total operating costs in state fiscal year 2011.

Table 17 compares, for each of the nine selected New York hospitals, Medicaid inpatient service payments—including regular payments, upper payment limit (UPL) supplemental payments, and total regular and UPL supplemental payments—to total estimated Medicaid costs for providing inpatient services in state fiscal year 2011.

Table 18 compares, for the nine selected New York hospitals, Medicaid inpatient service payments to total estimated operating costs for all services and all patients for state fiscal year 2011. Medicaid payments include regular and UPL supplemental payments for hospital inpatient services and total Disproportionate Share Hospital supplemental payments.

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

Appendix IX: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact named above, Tim Bushfield (Assistant Director), Pauline Adams, Elizabeth Conklin, Iola D’Souza, Julianne Flowers, Vikki Porter, Roseanne Price, and Sandra George made key contributions to this report.

Related GAO Products

High-Risk Series: An Update. GAO-15-290. Washington, D.C.: February 11, 2015.

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

Medicaid: Completed and Preliminary Work Indicates That Transparency around State Financing Methods and Payments to Providers Is Still Needed for Oversight. GAO-14-817T. Washington, D.C.: July 29, 2014.

High-Risk Series: An Update. GAO-13-283. Washington, D.C.: February 2013.

Medicaid: More Transparency of and Accountability for Supplemental Payments Are Needed. GAO-13-48. Washington, D.C.: November 26, 2012.

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

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

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

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

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

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

Medicaid Financing: States’ Use of Contingency-Fee Consultants to Maximize Federal Reimbursements Highlights Need for Improved Federal Oversight. GAO-05-748. Washington, D.C.: June 28, 2005.

Medicaid: Intergovernmental Transfers Have Facilitated State Financing Schemes. GAO-04-574T. Washington, D.C.: March 18, 2004.

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