Established under title XIX of the Social Security Act as a joint federal- state health financing program, Medicaid is one of the largest programs in the federal and state budgets. States, in administering their Medicaid programs, must comply with federal requirements. States pay qualified health providers for a broad range of covered services provided to eligible beneficiaries. The federal government then reimburses states for a share of their expenditures. The federal share of each state’s program expenditures is calculated according to a formula specified in the Medicaid statute, which allows the federal share to range from 50 to 83 percent. With Medicaid as payer of last resort, states are responsible for having plans in place to identify Medicaid beneficiaries’ other sources of health coverage, determine the extent of the liability of such third parties, avoid payment of third-party claims, and recover reimbursement from third parties after Medicaid payment if the state can reasonably expect to recover more than it spends in seeking reimbursement. Individuals eligible for Medicaid assign their right to third-party payments to the state’s Medicaid agency, which allows the state to claim payments for medical care directly from third parties. In general, state Medicaid agencies are required whenever possible to avoid paying for services for which the state agency has reason to believe another party is legally liable. Whenever states are reimbursed by third parties, they must ensure that the federal government is given its share of the reimbursement. Third parties that may be liable for payment of services furnished to Medicaid beneficiaries can include private insurers and health plans of employers who self-insure. Private health coverage can be delivered through managed care plans—plans in which enrollees, or their employers, pay a monthly payment in exchange for health care services through affiliated physicians, hospitals, and other providers. In addition, private insurers and health plans often contract with other entities, such as plan administrators or pharmacy benefit managers, to administer part or all of their health care plans. Plan administrators process claims and manage the day-to-day operations of the associated health plan. Pharmacy benefit managers negotiate drug prices with pharmacies and drug manufacturers on behalf of health plans and, in addition to other administrative, clinical, and cost-containment services, process prescription drug claims for the health plans. When a Medicaid beneficiary has pharmacy coverage administered through a pharmacy benefit manager, the state generally bills the pharmacy benefit manager directly for reimbursement instead of billing the insurer or the employer. For states to avoid paying costs for which a third party may be liable, or to recover from a liable third party payments the state may already have made, states need to verify when Medicaid beneficiaries have other health coverage, as well as the services that are covered and the period of eligibility. States obtain information on other health coverage in two common ways: When initially applying for enrollment in a state’s Medicaid program, applicants are asked to report to the state any other sources of health coverage they may have. States then verify the applicant’s coverage with the source of the health coverage, including coverage dates, type, benefits, and limits. State Medicaid programs often have staff who, on receiving information suggesting that a Medicaid applicant has other health coverage, contact the sources of such coverage by phone, mail, or other means to obtain specific coverage information. States also often independently identify and verify health coverage of Medicaid beneficiaries by electronically matching the states’ coverage files with those of the other coverage sources. This type of verification is important because information provided by Medicaid applicants may be incomplete. Applicants may not report other sources of health coverage, or they may not know if they have such coverage; for example, a custodial parent may not realize that his or her child has health coverage through the noncustodial parent’s employment-based health plan. Additionally, Medicaid beneficiaries who do not have other coverage when they first enroll in Medicaid may obtain it later. States may have agreements, called data-matching agreements, through which insurers, health plans, and other potential third parties periodically provide states with an electronic copy of their coverage files or with access to company databases. Third parties that are willing to work with states to electronically share their coverage files facilitate appropriate billings and reduce the administrative burden, on states and on third parties, associated with verifying coverage on a case-by-case basis. Once verification of any available private health coverage occurs, the state can redirect health care providers’ claims to a responsible third party (a process known as cost avoidance), and it can seek reimbursement from the third party for payments it has already made (a process known as “pay and chase”). Identifying and verifying coverage early is important, because it is administratively more costly and time-consuming for states to seek reimbursement for payments that have already been made. If third parties do not readily pay claims for which the state Medicaid agency is seeking payment, it is often not cost-effective for states to spend resources pursuing payment on a claim-by-claim basis, even though substantial total dollars could be involved. For example, the states might not have the resources to further pursue payment through legal action. Conversely, success in verifying coverage, avoiding Medicaid payments for those beneficiaries with private health coverage, and collecting on previously paid claims from third parties can result in substantial Medicaid savings. Of the $5.5 billion that states reported in third-party-related savings in fiscal year 2004, states reported more than $4.9 billion in Medicaid payments avoided and more than $524 million in third-party recoveries. On the basis of self-reported health coverage information from the Census Bureau’s annual CPS covering the 2002 through 2004 time period, an average of 13 percent of respondents who reported having Medicaid coverage for the entire year also reported having private health coverage at some time during the same year. Individual state estimates ranged from 9 percent in Alabama, Arizona, and California to 22 percent in Iowa and South Dakota and 23 percent in Wyoming (see table 1). Most often, the source of private health coverage was an employer or union. Nationwide, an estimated 11 percent of Medicaid beneficiaries reported having employment-based health coverage (ranging from about 7 percent in Arizona and Alabama to about 17 percent in Colorado, Michigan, New Hampshire, and Wyoming), whereas about 2 percent reported having individual health coverage (ranging from about 1 percent in 11 states to about 8 percent in Iowa). States also identify and collect information on private health coverage as part of administering their own Medicaid programs, but this information cannot be used to assess Medicaid beneficiaries’ private health coverage on a nationwide basis. State Medicaid agencies capture from their automated systems information on private health coverage they have identified for their Medicaid beneficiaries. According to CMS, however, this information is not reliable for measuring the extent of beneficiaries’ private health coverage nationwide, for comparing among states, or for comparing states’ identified coverage with that identified by CPS. Certain states may, for example, capture information only for those beneficiaries whose coverage has been verified, while other states may capture coverage even though the state has not yet verified the services that are covered or the period of eligibility. Problems states face in ensuring that Medicaid is the payer of last resort fall into two broad categories: problems verifying whether beneficiaries have private health coverage and problems collecting payments (or “paying and chasing”) when such coverage exists. Third-party liability provisions in the Deficit Reduction Act could help address some of these problems, although two issues require resolution in order to aid states as they implement the act. In particular, federal guidance is needed to clarify the time by which states must comply with the relevant provisions and also to clarify the entities covered by requirements to provide states with information regarding third-party coverage. Verification of available private health coverage for Medicaid beneficiaries is key to ensuring that states are able to appropriately avoid paying claims or to collect from those that are liable. Nevertheless, state officials often told us, one of the top three problems they faced in ensuring that Medicaid was the payer of last resort was related to verifying beneficiaries’ other coverage. Some state officials reported their problem broadly, stating, for example, that third parties would not cooperate in providing eligibility or coverage information. Others cited specific problems related to the verification process, stating, for example, that third parties would not assist with the state’s verification process by sharing coverage files electronically. Officials from 27 of the 39 responding states reported one or more different types of problems with verifying the services that were covered and the period of eligibility, which we summarized in two categories (see table 2): (1) verifying coverage information and (2) accessing electronic coverage files. Although most states’ officials were not able to estimate the losses to the Medicaid program due to these verification problems, officials in 10 states did provide an estimate. The estimated loss for these 10 states totaled $54 million–$60 million (the loss is stated as a range because some states estimated their losses as a range rather than as a single dollar estimate). Problems verifying coverage information. Officials in 23 states reported problems verifying coverage information; of these, officials in 8 states were able to estimate their annual losses due to third parties’ failure to provide coverage information, for a total of $47 million–$52 million. State officials reported a range of problems they experienced in verifying coverage information. For example, officials in 12 states indicated that certain third parties or their contractors, such as self-insured plans, pharmacy benefit managers, or plan administrators, ignored the state’s requests for verification information about Medicaid beneficiaries or declined to verify coverage. Four states reported that third parties cited privacy provisions in the Health Insurance Portability and Accountability Act of 1996 as one reason they could not share coverage information with state Medicaid offices. Additionally, an official in 1 state reported that some third parties would not verify coverage for seasonal workers and that some insurance companies limited the number of verifications they were willing to provide during a single phone call. Problems accessing electronic coverage files. Officials in five states reported verification problems specifically related to accessing the electronic coverage files of third parties and their contractors; officials in two of these states were able to estimate their annual losses due to lack of access to electronic coverage files, for a total of $7 million–$8 million. The systematic cross-checking of state and third-party health coverage data, which access to electronic files makes possible, improves states’ ability to identify beneficiaries with third-party health coverage. Officials in two states commented, for example, that data-matching agreements would enhance their discovery of private health coverage or would greatly improve their billing capabilities. Officials in five states reported that third parties would not participate in data-matching agreements or that electronic coverage files were not made available to the states. The potential losses to Medicaid because of lack of verification information, both electronic and other, may be sizable. Officials from the private consulting firm we contacted estimated that its recoveries from a major pharmacy benefit manager increased by more than 200 percent after the pharmacy benefit manager shared coverage information with the consulting firm. Given such an increase from this one-time sharing of information, the consulting firm estimated that recoveries from the four largest pharmacy benefit managers could potentially rise by more than $300 million a year if such information sharing occurred regularly. If a state has not established the existence of third-party coverage at the time a claim is submitted, it must pay the claim and collect its payment from the liable party later, after that coverage has been verified. Officials in 35 of the 39 reporting states listed problems with such “pay-and-chase” scenarios among their top three problems faced in ensuring that Medicaid is the last payer. We summarize these problems in five categories: (1) time limits for filing claims, (2) restrictions imposed by managed care and health plans, (3) inconsistent claiming requirements imposed by third parties, (4) lack of response or cooperation from third parties, and (5) weak or problematic state or federal legislation. Although officials in most states were unable to estimate their losses due to problems associated with collecting payments from third parties, officials in 14 states estimated a total annual loss of $184 million–$196 million (see table 3). (The loss is stated as a range because some states estimated their losses as a range rather than as a single dollar figure.) Problems with time limits for filing claims. Officials in 15 states reported problems related to timely filing of claims; officials in 10 states were able to estimate their annual losses in this category, for a total of $76 million–$77 million. State officials reported that some third parties and their contractors have established specific time limits for filing claims. That is, a third party or its contractor might process a claim only if it is filed within a certain time period after services are provided—such as within 60 or 90 days from the date of service. If a state does not submit its claim for services provided to a Medicaid beneficiary within the specified time, some third parties deny payment of the claim. According to state officials, time limits—such as 60 or 90 days from the date of service—pose a particular problem because of how long it can take to verify Medicaid beneficiaries’ private health coverage. An official in 1 state, for example, estimated that in 1 year (November 2004 through October 2005), third- parties rejected more than $32 million in claims from the state because the state did not submit the claims within the third-parties’ established time frames. Problems with restrictions imposed by managed care and health plans. Officials in 17 states reported problems imposed by managed care and health plan restrictions; officials in 10 of these states were able to estimate their annual losses in this category, for a total of $74 million. State officials reported a range of issues relating to restrictions the plans imposed as to when services are covered or to whom reimbursements for claims can be made. For example, officials in 9 states reported that some third parties or their contractors would not reimburse the state for services provided to covered Medicaid beneficiaries if the Medicaid beneficiaries did not follow requirements established in the third parties’ managed care plans, such as obtaining prior authorization for services. One state official estimated an annual loss to the state’s Medicaid program of more than $11 million per year because of managed care plans’ requirements that the Medicaid beneficiaries also covered under the managed care plan obtain preauthorization for services; if such authorization was not obtained by the beneficiary, the managed care plans would not reimburse the state Medicaid program. Another type of restriction that states reported related to requirements for whom the health plan would reimburse. For example, officials in 2 states reported problems with health plans whose coverage provisions did not allow them to pay state Medicaid programs directly but instead required that payments be made to the Medicaid beneficiaries themselves. An official in 1 state remarked that it was labor intensive and often impossible to recoup such payments from beneficiaries. Problems with inconsistent claims requirements among third parties and limited state capacity to bill electronically. Officials in 13 states reported problems related to third parties’ or their contractors’ inconsistent requirements for claims or problems related to limits in the states’ capacity to bill electronically; officials in 3 states were able to estimate their annual losses in this category, for a total of $13 million. Some third parties or their contractors, for example, required claims to be submitted electronically, while others could not accept electronic claims. Third parties or their contractors also rejected claims because they were not in a format acceptable to the third party or did not contain specific pieces of information. For example, an official in 1 state told us that third parties may require information on their claim forms that Medicaid does not require or collect, such as a unique provider number, and a state can have difficulty obtaining such information after the fact. The official in this state estimated a loss of $600,000 in a single year because of such problems. Administrative problems like these are compounded because states submit claims to many different third parties, each with their own formats and requirements. Problems with lack of response or cooperation from third parties or their contractors. Officials in 12 states reported problems related to third parties’ lack of response to or cooperation with claims filed for payment; of these, 3 states were able to estimate their annual losses in this category, for a total of $4 million–$6 million. Some problems arose, for example, when third parties’ contractors, such as pharmacy benefit managers, were not specifically authorized by the third parties to process or pay the claims on the third parties’ behalf when the claims originated from state Medicaid programs. According to CMS, one problem involves Medicaid beneficiaries who have pharmacy coverage administered through a pharmacy benefit manager that has not been specifically authorized by its contracting health plan or insurer to process Medicaid claims from the state. If the beneficiary provides a pharmacist with information on his or her Medicaid coverage, rather than information on the pharmacy benefit manager, the pharmacist may receive payment from the state Medicaid program, which must then seek reimbursement for its payment from the pharmacy benefit manager (“pay and chase”). Often, the pharmacy benefit manager returns these claims unpaid to the state and suggests that the state bill the third party directly. This situation creates an administrative problem for the state, since beneficiaries’ health plan cards generally identify only the pharmacy benefit manager and not the contracting insurer or health plan. An official in 1 state also commented that third parties created inappropriate denial reasons, such as the state’s failure to submit a copy of a Medicaid beneficiary’s health insurance card with the state’s claim. Officials in 3 states reported that third parties would not respond to their claims. An official in another state observed that third parties can ignore claims submitted to them because no penalty or requirement exists for third parties to reimburse Medicaid. Weak or problematic state or federal legislation. Officials in seven states—responding to our information request before the 2006 enactment of the Deficit Reduction Act—reported that weak or problematic state or federal legislation hindered their efforts to ensure that Medicaid was the payer of last resort; officials in two of these states were able to estimate their annual losses in this category, for a total of $17 million–$26 million. Officials suggested the need for stronger state or federal legislation, which would require third parties to pay Medicaid claims, participate in electronic data matching of coverage information, or extend the time frames for states to file claims. One state official, for example, indicated that stronger legislation, with more comprehensive requirements that third parties doing business in the state reimburse the state, would be helpful. Two other state officials indicated that an existing provision in Medicaid legislation, which requires the states to pay claims under certain circumstances even when the state is aware of other coverage, was problematic. Specifically, this requirement—intended to prevent delays in care for pregnant women and for children—requires states to pay and chase when claims are for prenatal care and preventive pediatric services and when services are provided to a minor for whom the state is enforcing a child-support order against a noncustodial parent. The President’s fiscal year 2007 budget included a legislative proposal to change this requirement. Under the proposal, states would be allowed to avoid costs, rather than pay and chase, for claims for prenatal and preventive pediatric services when a third party is responsible through a noncustodial parent’s obligation to provide coverage, if the states ensure protection for providers and beneficiaries. Although in most cases—21 of 35 states that reported problems collecting from third parties or their contractors—state officials we contacted were unable to estimate the losses to Medicaid due to problems collecting from third parties, the total losses could be sizable. The private consulting firm that works with states reported collecting $60 million for states in 2005 by rebilling third parties for previously unprocessed claims. According to state officials and CMS, many states do not have the resources to follow up repeatedly on claims that have been rejected or otherwise unpaid and so potentially suffer annual losses in the millions of dollars. The Deficit Reduction Act addresses some of the problems reported by state officials. For example, the new law adds to the existing list of entities that may be considered third parties certain entities that were previously not specifically listed, including “self-insured plans”; “managed care organizations”; “pharmacy benefit managers”; and “other parties that are, by statute, contract, or agreement, legally responsible for payment of a claim for a health care item or service.” In addition, the law requires states to have in effect laws requiring certain specified entities, as a condition of doing business in their state, to provide the state, upon request, with coverage and other data, including information on the nature of coverage and the periods of time during which individuals or their spouses or dependents were covered; accept the states’ right of recovery for services and assignment of a Medicaid enrollee’s right to payment by those entities or organizations; respond to inquiries by the state regarding a claim for payment submitted within 3 years after the date a service was provided; and agree not to deny a claim submitted by the state solely on the basis of the date of submission of the claim, the type or format of the claim form, or failure to provide proper documentation at the time of service, as long as the claim is submitted by the state within 3 years of the service date and the state enforces its rights with respect to the claim within 6 years of submitting it. Officials from some states and the private consulting firm that works with states told us that the act’s requirements may help alleviate states’ reported problems with verifying coverage information, time limits for filing claims, and certain third parties’ lack of response or cooperation with claims submitted for payment—three of the problems most often reported by states responding to our questions. Losses due to these problems can be substantial: in response to our information request, 30 states estimated such losses at collectively more than $120 million annually. The private consulting firm reported that, after discussing with pharmacy benefit managers the new Deficit Reduction Act provision related to time limits for filing claims, the firm agreed to loosen its own time frames for filing, resulting in an estimated $2 million dollars in savings for outstanding claims. Because the Deficit Reduction Act requires states to have legislation in effect to implement the new provisions, it is too soon to assess the extent to which the act will address the problems that states reported to us. Further, we identified two issues that require resolution in order to aid states in complying with the act’s requirements: First, the time frame by which states must have their laws in effect is uncertain because of an apparent inconsistency within the Deficit Reduction Act concerning the effective date of that provision. Specifically, the section of the law that determines the date by which states must have these laws in effect references a section of the law that does not exist. In June 2006, CMS officials said they had not determined how to interpret the apparently inconsistent language and whether legislation would be necessary to resolve it. Until this determination is made, states may be uncertain as to the date by which they must comply with this requirement of the Deficit Reduction Act. Some state legislatures, for example, may act upon new Medicaid requirements such as this one only upon notification of a specific implementation date. Second, there is also some disagreement in the industry as to whether the statutory provisions regarding the requirement to provide states with coverage and other information apply to certain entities. According to CMS and officials from the private consulting firm, some entities, such as certain pharmacy benefit managers and plan administrators, have indicated that the requirement that states have laws in effect to require reporting of coverage and related information does not apply to them. For example, private insurers and health plans may hire pharmacy benefit managers and plan administrators to process the claims—that is, to pay the claims on their behalf—and the pharmacy benefit managers and plan administrators may not view themselves as “legally responsible for payment of a claim for a health care item or service.” Without cooperation from these contracted entities in sharing coverage information and in paying claims, states may continue to have many of the problems they reported. CMS officials said that they had met with trade associations representing pharmacy benefit managers and plan administrators to discuss and obtain input about these entities’ responsibilities under the Deficit Reduction Act. With regard to both provisions, in June 2006, CMS officials said that they were determining how best to help states implement the new requirements. The agency was reviewing how to interpret the law to address both the effective date for the requirement to have state legislation in effect and which entities are covered by requirements to provide states with information on coverage and other matters. The effectiveness of the Deficit Reduction Act’s third-party liability provisions in addressing the problems that states identified may depend on the guidance CMS issues and in what manner states carry out the new law’s provisions. In an era of fiscal pressure on both federal and state budgets, it is important to ensure that Medicaid is administered as efficiently and effectively as possible. States have a key role in Medicaid’s successful administration, including efforts to ensure, as Congress intended, that Medicaid does not pay for services when other sources of health care coverage are available. With an estimated 13 percent of Medicaid beneficiaries having private health coverage available to them, significant savings can accrue to both the federal government and the states when states are able to avoid costs and recover payments from liable third parties. We found, however, that states often encounter problems in identifying beneficiaries’ private health coverage and in collecting payments from liable third parties. The Deficit Reduction Act includes provisions related to some of the states’ concerns, and CMS could facilitate states’ efforts to implement the act’s requirements by providing guidance to states as to the time frame under which states must have their laws in effect and the types of entities to which the law applies. To resolve issues that are critical to the implementation of the Deficit Reduction Act’s third-party provisions and to assist states in their efforts to ensure that Medicaid is the payer of last resort, we recommend that the Administrator of CMS take the following two actions: Determine and provide guidance to states with regard to the time frames by which states must have in effect laws that implement relevant third- party requirements of the Deficit Reduction Act. Determine and provide guidance to states with regard to the entities covered by the Deficit Reduction Act’s requirements to provide states with coverage and other information. We provided a draft of this report to CMS for comment and received a written response from the agency (reproduced in app. II). The agency acknowledged that our report identified many of the challenges state Medicaid agencies face in attempting to ensure that Medicaid is the payer of last resort. CMS concurred with both recommendations and said that the agency planned to issue a decision with respect to the effective implementation date of, and the entities covered under, the Deficit Reduction Act. CMS also provided technical comments, including a comment that the report should clarify discussions regarding the provision of both coverage and eligibility data. We clarified our text to indicate that in this report we refer collectively to the process of determining the eligibility period and the services that are covered as “verifying health coverage.” We made a corresponding clarification to our recommendation. Other technical comments were incorporated as appropriate. As arranged with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days after its issue date. At that time, we will send copies of this report to the Secretary of Health and Human Services, the Administrator of the Centers for Medicare & Medicaid Services, and other interested parties. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff members have any questions, please contact me at (202) 512-7118 or allenk@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 acknowledged in appendix III. ppendix I: GAO’s Analysis of the Current urvey Conducted by the U.S. To assess the extent to which Medicaid beneficiaries have private health coverage, we analyzed the Annual Social and Economic Supplement of the Current Population Survey (CPS), conducted by the U.S. Census Bureau for the Bureau of Labor Statistics. This appendix describes CPS, our analysis of CPS, and our results. CPS is designed to represent a cross section of the nation’s civilian noninstitutionalized population. The sample provides estimates for the nation as a whole and serves as part of model-based estimates for individual states and other geographic areas. The supplement is designed to estimate family characteristics, including health coverage, during the previous year. In 2005, about 84,700 households were included in the sample for the Annual Social and Economic Supplement, with a total response rate of about 83 percent. In 2004 about 84,500 households were included with a total response rate of 84 percent. The totals for 2003 were approximately 81,000 and 85 percent, respectively. Each March, CPS gathers information about health coverage that respondents had at any time during the previous calendar year, including government health coverage such as Medicaid and private health coverage such as coverage provided through an employer or union (employment- based health coverage) and coverage directly purchased by the beneficiary (individual health coverage). CPS also asks for the number of months that beneficiaries had Medicaid coverage during that same year. Research has shown that health coverage is underreported in CPS for a variety of reasons; for example, many people may be unaware that a health insurance program covers them or their children if they have not recently used covered services. In addition, CPS underreports Medicaid coverage compared with enrollment and participation data from the Centers for Medicare & Medicaid Services. We analyzed data from the Annual Social and Economic Supplement to CPS from 2003 through 2005, which asked about health coverage during the prior year (2002 through 2004). To prepare official statistics from CPS on type of health insurance coverage, CPS identifies Medicaid beneficiaries by analyzing responses from multiple questions about whether the respondent had Medicaid at any time during the prior year. One of these questions has a related field allowing respondents to report the number of months that Medicaid coverage was provided. To identify individuals who had Medicaid and private health coverage concurrently in the same year, we focused our analysis on individuals who responded positively to the one Medicaid question and also reported having Medicaid coverage in all 12 months of the year. Specifically, we selected individuals who reported that they were covered by Medicaid for the entire prior year and determined the percentage of these Medicaid beneficiaries who reported that they also had employment-based health coverage or individual health coverage at some point in the prior year. To assess the reliability of the CPS data, we discussed with officials from the Census Bureau’s Poverty and Health Statistics Branch the use of this definition of Medicaid beneficiaries, and we reviewed the Census Bureau’s data quality-control procedures and related documentation. We determined that the data were sufficiently reliable for the purposes of this report. For additional information on Census efforts to ensure the reliability of CPS data—including adjustment for nonresponse, controls on nonsampling error, computing composite weights, estimation of variance, and derivation of independent population controls—see U.S. Department of Labor, Bureau of Labor Statistics; and U.S. Department of Commerce, U.S. Census Bureau, Current Population Survey: Design and Methodology, Technical Paper 63RV (Washington, D.C.: March 2002), http://www.bls.census.gov/cps/tp/tp63.htm (downloaded April 13, 2006). Updated survey information is available on the Web at http://www.bls.census.gov/cps. Because CPS is a probability-based sample, estimates derived from it are subject to sampling error: slightly different estimates can result from different samples. We expressed our confidence in the precision of the particular samples’ results as 95 percent confidence intervals (i.e., plus or minus 4 percentage points). This confidence interval is the interval that would contain the actual population value for 95 percent of the samples that could have been drawn. We used CPS’s general variance methodology in the technical documentation to estimate this sampling error for our 3-year average, reported as confidence intervals. All CPS percentage estimates contained in this report have 95 percent confidence intervals within plus or minus 7 percentage points of the estimate itself. In addition to the contact mentioned above, Katherine M. Iritani, Assistant Director; Ellen W. Chu; Kevin Dietz; Kevin Milne; Jill M. Peterson; and Terry Saiki made key contributions to this report.

Summary: Medicaid, jointly funded by the federal government and the states, finances health care for about 56 million low-income people at an estimated total cost of about $298 billion in fiscal year 2004. Congress intended Medicaid to be the payer of last resort: if Medicaid beneficiaries have another source of health care coverage--such as private health insurance or a health plan purchased individually or provided through an employer--that source, to the extent of its liability, should pay before Medicaid does. This concept is referred to as "third-party liability." When such coverage is used, savings accrue to the federal government and the states. Using data from the U.S. Census Bureau and the states, GAO examined (1) the extent to which Medicaid beneficiaries have private health coverage and (2) problems states face in ensuring that Medicaid is the payer of last resort, including the extent to which the Deficit Reduction Act of 2005 may help address these problems. On the basis of self-reported health coverage information from the Census Bureau's annual Current Population Surveys covering the 2002 through 2004 time period, an average of 13 percent of respondents who reported having Medicaid coverage for the entire year also reported having private health coverage at some time during the same year. This coverage most often was obtained through employment rather than purchased by individuals directly from an insurer: employment-based coverage averaged 11 percent nationwide, while individual coverage averaged 2 percent. Problems states have faced in ensuring that Medicaid is the payer of last resort fall into two general categories: verifying Medicaid beneficiaries' private health coverage and collecting payments from third parties. Officials from 27 of 39 states responding to GAO's request for information about the top three problems they faced reported problems in verifying beneficiaries' private health coverage--a key step states must take to avoid paying claims for which a third party is liable. In cases where states have paid claims before identifying that other coverage was available, states must seek payment for the claims they have already paid. Officials from 35 responding states had problems collecting such payments. Provisions in the Deficit Reduction Act of 2005 require states to have laws in effect that could help address some of the reported problems, but it is too soon to assess the extent to which the problems will be addressed. Further, GAO identified two issues that require resolution in order to aid states in complying with the Deficit Reduction Act's requirements, specifically, (1) the time frame by which states must have their laws in effect, and (2) which entities are subject to certain of the act's requirements. Regarding both issues, officials from the Centers for Medicare & Medicaid Services (CMS), which oversees Medicaid, said in June 2006 that they were considering how to interpret the law and how to best provide guidance to states to help them implement the requirements.