Medicaid is an open-ended entitlement: states are generally obligated to pay for covered services provided to eligible individuals, and the federal government is obligated to pay its share of a state’s expenditures under a federally approved state Medicaid plan. The federal share of each state’s Medicaid expenditures is based on a statutory formula known as the Federal Medical Assistance Percentage (FMAP). On average, the federal share of Medicaid service expenditures is about 57 percent. Some states design their Medicaid programs to require local governments to contribute to the programs’ costs, for example, through intergovernmental transfers of funds from government-owned or -operated providers to the state Medicaid program. States may, subject to certain requirements, also receive funds to finance Medicaid payments from health care providers, for example, through provider taxes—taxes levied on providers such as hospitals or nursing facilities. For example, federal law allows up to 60 percent of the nonfederal share to be financed by local governments. This requirement is applied on the basis of total annual Medicaid program spending and not on individual payments or types of payments. In addition to flexibility in determining sources of funds to use to finance their nonfederal share, states have flexibility, within broad federal requirements, in designing and operating their Medicaid programs, including determining services to cover and setting payment rates for providers. In general, federal law provides for federal matching funds for state Medicaid payments for covered services provided to eligible beneficiaries up to a ceiling or limit, often called the upper payment limit (UPL). The UPL is based on what Medicare would pay for the same services. Typically, state Medicaid payment rates are lower than what the Medicare program would pay, and so many states make supplemental payments under the UPL. Unlike regular Medicaid payments, which are generally based on claims submitted by providers for services rendered, supplemental payments often consist of large, lump sum payments made on a monthly, quarterly, or yearly basis and can be targeted to small groups of providers, such as local government hospitals. Supplemental payments totaled at least $43 billion in federal fiscal year 2011, including $26 billion made under the UPL, but reporting was incomplete. Supplemental payments have been growing in size, as they totaled at least $23 billion in federal fiscal year 2006. Our prior work has raised concerns about gaps in the oversight of supplemental payments made under the UPL. As part of its oversight responsibilities, CMS is responsible for ensuring that state Medicaid payments are consistent with federal requirements, including that Medicaid payments are economical and efficient. In recent years, we have found several instances of payments that raise concerns about compliance with these requirements. For example, in November 2012, we reported that 39 states had made supplemental payments to 505 hospitals that, along with their regular Medicaid payments, exceeded those hospitals’ total costs of providing Medicaid care by $2.7 billion. Although Medicaid payments are not required to be limited to a provider’s costs of delivering Medicaid services, payments that greatly exceed these costs raise questions; for example, as to whether payments are being used for allowable Medicaid expenditures. We have previously made recommendations to CMS—including recommendations to require states to report the amounts of UPL supplemental payments that they make to individual providers—to review all state supplemental payment programs, and enhance the oversight of payments made to government providers.CMS has not implemented all of these recommendations. We have also suggested that the Congress consider requiring CMS to require states to submit annual independent audits of supplemental payments made under the UPL, which are not currently subject to audit. CMS uses a range of tools to oversee state Medicaid payments, including review and approval of states’ Medicaid plans and amendments. State plans describe, among other things, who and how much states will pay for particular services. For any new payment or payment change, a state must submit a state plan amendment, for which CMS asks the state to provide information and data showing that state Medicaid provider payments (regular and supplemental payments combined) do not exceed the UPL for the category of service and type of provider ownership; and a written response to a set of standard questions intended to gauge the appropriateness of state payments and financing. For example, CMS asks states during this process if the payment change will result in any government provider receiving payments that exceed the provider’s reasonable costs of providing Medicaid services. CMS also tracks and reviews states’ total Medicaid expenditures on a quarterly basis. States seek federal matching funds by submitting aggregated spending amounts for broad categories of services on a standard form known as the CMS-64. In the report that is being released today, we found that states used funds from health care providers and local governments to finance 26 percent, or over $46 billion, of the $180 billion in the total nonfederal share of Medicaid payments—both regular and supplemental—in state fiscal year 2012. Of the total amount of funds from health care providers and local governments, taxes on providers were the largest single source of funds, followed by transfers of funds from local governments. Of the over $46 billion, states received $18.8 billion from health care provider taxes and $18.1 billion from transfers of funds from local governments. States’ reliance on funds from health care providers and local governments to finance the nonfederal share of Medicaid payments increased by over 21 percent from state fiscal years 2008 through 2012, in large part due to increases in revenues from health care provider taxes. Specifically, the percentage of funds from health care providers and local governments that states used to finance the nonfederal share increased from 21 percent to 26 percent during this 5-year period, for an increase of 5 percentage points, or 21 percent. While the total amount of funds from all sources, including state funds, increased during this period, funds from providers and local governments increased as a percentage of the nonfederal share, while the percentage of state funds decreased. Health care provider taxes represented the source of funds from health care providers and local governments with the largest increase, $9 billion, during the 5-year time period. We found that a total of 85 new provider taxes were implemented in 32 states during this time period. Our analysis shows that for supplemental payments alone, the percentage of the nonfederal share that states financed with funds from health care providers and local governments was relatively high, and increasing. In particular, the percentage of the nonfederal share of supplemental payments that was financed with funds from providers and local governments increased from 57 percent in 2008 to 70 percent in 2012. In other words, almost three-quarters of the nonfederal share of supplemental payments was financed by providers, and not state funds. These large payments that states can target to small groups of providers without linking them to services provided were, to a much greater extent than regular Medicaid payments, financed by the providers. In the report we are releasing today, we also found that CMS does not collect complete and accurate data on state Medicaid financing methods. States are required, under federal law, to report the amounts of funds from provider taxes and donations used to finance the nonfederal share, but CMS has not ensured that this data is complete and accurate. Reporting of funds from local government providers and local governments that are used by states to finance the nonfederal share of Medicaid is not required under federal law. CMS may seek on a case- specific basis information on financing arrangements when reviewing individual state plan amendments; however, the information provided varies by state, and CMS officials reported that states are not required to identify the amount of funds provided by or on behalf of any specific providers or the amount of payments made to providers. Without accurate and complete information on state sources of funds, we concluded that CMS is unable to adequately understand and oversee Medicaid financing and payments, including net payments, to individual providers. In the report we are releasing today, we recommend that CMS take steps to ensure states report accurate and complete information on all sources of funds used to finance the nonfederal share. CMS did not agree with our recommendation and stated that the agency’s current data collection processes are sufficient, and at this time more detailed reporting is not needed. In the report being released today, we present information on recent changes in financing arrangements involving funds from providers and local governments in three selected states that illustrates how such changes can shift Medicaid costs from the state to the federal government. In effect, states seeking to raise payment rates to providers can finance those increased rates by asking providers to provide the funds to finance the state share of the payment, and then seek federal matching on the larger amount. By increasing providers’ Medicaid payments, and at the same time imposing requirements on providers receiving the payments to supply all or most of the nonfederal share for the payments, states could obtain additional federal matching funds for those facilities’ payments without a commensurate increase in state general funds. The use of funds from providers and local governments is, as previously described, allowable under federal rules, but it can also have implications for federal costs. And from the providers’ perspective, the use of funds from providers to finance an increase in Medicaid payments results in a net payment to the provider that is less than the amount used for purposes of claiming federal funds. In three selected states, we reviewed a financing arrangement that involved financing the nonfederal share of new Medicaid payments with funds from provider taxes or transfers of funds from local governments put in place in recent years. For these arrangements, we estimated the effect on the federal and state shares of new payments the state was making. In each case, we determined that the result was a net increase in payments to the providers—after accounting for both the payment increase they received, as well as the increased funds they or a local government provided to the state to finance the nonfederal share of the payments—and increases in costs to the federal government. The state contribution to the new Medicaid payments, in each case, did not increase compared to what it would have been had the new financing arrangement not taken place. For example, one state increased regular Medicaid payments for nursing facilities in May 2011, and financed these payments with a provider tax on nursing facilities. According to our estimates, the increased regular Medicaid payment and new provider tax had the effect of increasing federal matching payments by $110 million. The overall net increase in provider payments—that is, the increase in total Medicaid payments ($220 million) minus the total cost of the new provider tax ($115 million)—was $105 million. The state supplied $5 million less in state general funds than it would have paid had the increased payment and new provider tax not gone into effect. Our ongoing work has identified two major gaps in federal data necessary for overseeing Medicaid payments. First, neither of the two major sets of data that CMS has available for oversight captures the ownership status—government or private—of individual providers. Second, federal data on state Medicaid payments generally capture regular payments for services rendered by individual providers, but generally do not capture states’ lump sum supplemental payments to individual providers. We have previously reported that data on the providers receiving supplemental payments, and the amounts paid to particular providers, are States generally do not maintained by the state making the payments.submit these payments to CMS for inclusion in its automated claim data system, which captures regular payments made to individual providers. Without provider-specific payment data that includes supplemental payments, CMS does not have a complete picture of how the $43 billion in supplemental payments mentioned above in this statement was allocated among the individual government or private providers. As a result of these two gaps in the federal data on state Medicaid payments, CMS is not able to assess payments to government providers compared to private providers, and cannot detect any outlier provider payments, such as providers receiving significantly larger amounts in Medicaid payments than other providers providing similar services. This lack of data also limits CMS’s ability to ensure that payments to individual providers are economical and efficient. At the state level, our ongoing work has found that the state payment data needed to understand provider-specific payments can be challenging to obtain and assess, and are not always reliable. We have sought to obtain payment data on supplemental payments, by ownership, from three selected states to combine with federal data on regular Medicaid payments so that we could assess how total Medicaid payments to government providers compare to payments to private providers. Doing this work, however, has proved to be difficult, illustrating the challenge in overseeing Medicaid payments and ensuring that payments to individual providers are economical and efficient. In each of the three states, we encountered obstacles in capturing complete information on payments and provider ownership. For example, states may use multiple provider identification numbers for the same provider; use a different provider identification number for supplemental payments versus regular payments, complicating the process of combining data sets to understand full payments to individual providers; and be unable to report provider ownership by state government, local government, and private. Our ongoing effort to compile reliable and accurate provider-specific ownership and supplemental payment data has been, and continues to be, a time consuming and labor intensive effort as a result of data obstacles. We have encountered issues with data in all three states. For one of the three states, we have determined that data issues are of such difficulty that they preclude completing an assessment. The state was not able to provide us with data that were sufficiently reliable to allow us to identify Medicaid payments by provider ownership. In one state for which we have determined that data were sufficiently reliable to report today, our preliminary analysis of the state’s payments for inpatient hospitals in state fiscal year 2011 suggests the need for and value of having complete data to analyze Medicaid payments by provider ownership. For this state, we were able to combine the state-provided supplemental payments made under the UPL and provider ownership data with the federal claims data on regular payments and Medicaid patient days. Although our work analyzing this state’s data to examine payments for different types of services to different types of providers is ongoing, we have completed the preliminary analysis for one type of service: inpatient hospital payments. With these data, we have determined each hospital’s daily payment amount by dividing total Medicaid payments for each hospital by the hospital’s total Medicaid patient days. We then calculated the average daily payment amounts for three categories of provider ownership: state government, local government, and private. Where possible, our preliminary analysis adjusted regular payments for differences in the conditions of the patients treated by the hospitals, commonly referred to as “case mix” adjustments. Our preliminary analysis shows that For the regular payments, state government hospitals had the highest average daily payment amount, at about $1,140, which was 19 percent higher than the average for local government hospitals ($940) and 29 percent higher than the average for private hospitals ($860). When the state’s supplemental payments were factored in, local government hospitals replaced state government hospitals as receiving the highest average, and the gap between the local government hospitals’ and private hospitals’ averages increased further. Local government hospitals’ average daily payment amount was about $1,470, which was 25 percent higher than the average for state government hospitals ($1,140) and 44 percent higher than for private hospitals ($930). Our preliminary analysis also shows that, because the state was targeting its UPL supplemental payments to only two local government hospitals, the higher payments to these hospitals accounted for much of the differences in average daily payment amounts when UPL supplemental payments were included in the average. Together these hospitals received nearly $416 million in UPL supplemental payments, compared to $70 million in regular Medicaid payments. Our preliminary analysis of the average daily payment amounts for regular and UPL supplemental payments for these two hospitals suggests that the average amount at one hospital was as high as about $8,800 per day, significantly higher than the approximately $1,470 average amount for all local government hospitals. The other hospital had a lower average, although it was still higher than the average for private hospitals. According to the state’s Medicaid officials, these hospitals served higher needs patients. Our preliminary examination of key documentation around CMS’s review of the provisions authorizing the state’s supplemental payments to these two local government hospitals shows that CMS’s documentation did not identify the large supplemental payments the two hospitals received. We reviewed the state plan amendment authorizing the supplemental payment, the funding questions that CMS asked when the state submitted a proposed change to the payment, and the annual report the state submitted to CMS in 2011 regarding the state’s estimated UPL for local government hospitals. Our preliminary observations when reviewing this documentation were that The state plan amendment approved by CMS in June 2011 authorized the state to make over $400 million in supplemental payments proportionally to all local government hospitals eligible for a payment under the state plan amendment. The state plan amendment, however, did not specify the number or names of hospitals that were eligible based on somewhat ambiguous eligibility criteria including that they be located in a city of a certain size and having received a certain amount of medical assistance payments. When the state proposed to increase the supplemental payment amount through a state plan amendment, CMS followed its process for requesting new information on the payments—in particular, whether any payments to governmental providers would exceed the providers’ reasonable costs of providing services. However, the state’s written response did not indicate whether any providers would be paid above their costs and instead stated that it was “unaware of any requirement under current federal law or regulation that limits individual provider payments to their actual costs.” Information provided by the state under CMS’s requirement that states submit information showing that state payments would not exceed the UPL did not contain information on the actual payments individual hospitals received. As requested by CMS, the state submitted information on the methodology for estimating each hospital’s UPL, but did not submit actual UPL payment information that would have shown that the state was making all of the supplemental payments to only two hospitals. The state’s estimate of what Medicare would have paid the hospitals for the Medicaid services provided was about $100 million, compared to the $416 million those two facilities received. Since the UPL is applied across a class of facilities, in this case local government hospitals, and not for individual facilities or hospitals, the state was able to direct all supplemental payments available for all 21 local government hospitals under the UPL to the two local government hospitals. In reviewing information on the state’s payments to the two hospitals, our preliminary analysis found that the state did not contribute any state general funds to finance the nonfederal share of the two hospitals’ supplemental payments, as the nonfederal share of the payments was financed by a local government that operated the two hospitals. This illustrates prior concerns we have raised about the incentives to overpay certain government providers, including those for which the state is not providing funds to finance the nonfederal share. In discussing the circumstances around these two hospitals payments and payment amounts, CMS officials reported that they review the total amount of UPL supplemental payments for local government hospitals as a group, and not payments to individual hospitals. We will continue to complete our ongoing work and will issue a final report later this year including any suggested actions needed by CMS, as appropriate. In conclusion, our report that is being released today on how states are financing the nonfederal share of Medicaid, and our ongoing work on Medicaid payments to government providers, demonstrate the importance and need for effective federal oversight. CMS has taken important steps over the years to enhance its oversight, including requiring annual demonstrations of state UPL estimates. We believe even more can be done to improve the transparency of Medicaid financing and payments, including previous recommendations that have not been implemented, such as facility specific reporting of supplemental payments and review of all state supplemental payment programs, and the recommendation from the report we are issuing today that CMS take steps to ensure states report accurate and complete data on all sources of funds to finance the nonfederal share. Chairman Lankford, Ranking Member Speier, and Members of the Subcommittee, this concludes my prepared statement. I would be pleased to respond to any questions you may have. If you or your staff have any questions about this testimony, 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 statement. Tim Bushfield, Assistant Director; Elizabeth Conklin; Julianne Flowers; Sandra George; Peter Mangano; and Roseanne Price were key contributors to this statement. 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. 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: Data Sets Provide Inconsistent Picture of Expenditures. GAO-13-47. Washington, D.C.: October 29, 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. High-Risk Series: An Update. GAO-11-278. Washington, D.C.: February 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. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Summary: Medicaid is a joint federal and state program for which the federal government matches state Medicaid expenditures. Total program costs were about $432 billion in federal fiscal year 2012. States use various sources of funds to finance the nonfederal share, such as state funds and funds from health care providers and local governments. Medicaid has been on GAO's list of high-risk programs since 2003, in part, because of concerns about federal oversight of complex state Medicaid financing arrangements where states seek funds from the providers for the nonfederal share of the payments, and oversight of large supplemental payments that states often make to government providers. States may have incentives to overpay providers that help finance the nonfederal share to maximize federal matching funds. This statement highlights (1) findings from GAO's report being issued today on how states' reliance on health care providers and local governments to finance Medicaid changed from state fiscal years 2008 through 2012, and implications of these changes; and (2) preliminary results from GAO's ongoing work on what is known about data to oversee state Medicaid payments to government and private providers. For this work, GAO surveyed states, interviewed CMS and state officials, and reviewed information in three states selected, in part, on the basis of size, Medicaid payments, and geographic diversity. GAO shared information on its preliminary observations with CMS and incorporated comments as appropriate. In its report being issued today ( GAO-14-627 ), GAO found that states' reliance on funds from health care providers and local governments to finance Medicaid has increased in recent years, with implications for federal costs. In state fiscal year 2012, while most of the nonfederal share was from state general funds, states used funds from health care providers and local governments to finance 26 percent, or over $46 billion, of the total nonfederal share of Medicaid payments. States' reliance on funds from health care providers and local governments to finance the nonfederal share increased by over 21 percent from state fiscal years 2008 through 2012. States' increasing use of funds generated from health care provider taxes was one main contributing factor to this increase. States' increasing reliance on providers and local governments to finance Medicaid can effectively shift costs from the state to the federal government, as illustrated by GAO's work in three selected states. For example, in one state, a $220 million payment increase for private nursing facilities funded by a tax on private nursing facilities resulted in an estimated $110 million increase in federal matching funds and no increase in state general funds, and a net payment increase to the facilities, after paying the taxes, of $105 million. GAO's preliminary results from ongoing work related to state Medicaid payments to government providers shows that data needed for overseeing Medicaid payments are lacking. Federal payment data do not capture on a provider-specific basis certain large supplemental payments states often make and generally lack information on provider ownership. At the state level, preliminary results in three selected states suggest that payment data primarily maintained by states are not always reliable and can be challenging to obtain and assess. GAO's preliminary analysis of Medicaid payments to government hospitals in one state suggests the need for and value of better data for oversight. GAO estimates that on an average per day basis, the state's 2011 inpatient hospital payments were higher for local government hospitals than for private hospitals. For local government hospitals, the higher average payment was largely due to supplemental Medicaid payments the state made to two local government hospitals. State officials said these hospitals served patients with greater needs. However, the state's own estimate of what Medicare would have paid these hospitals for similar services was $100 million, much less than the $416 million in supplemental Medicaid payments and $70 million in regular payments that the hospitals received. Documentation from the Centers for Medicare & Medicaid Services' (CMS) payment review process did not identify the actual supplemental payments these hospitals received. GAO plans to issue its final report later this year. In GAO's past reports and the report being released today ( GAO-14-627 ), GAO has made recommendations to CMS to improve Medicaid payment oversight and develop a data collection strategy to improve the transparency of state financing methods. CMS has taken steps to improve the transparency and oversight of Medicaid financing and payments but has not implemented all of GAO's prior recommendations, and has generally disagreed with GAO's new recommendation. CMS believes that additional action is not needed. As discussed in the statement, GAO continues to believe that provider-specific information on state Medicaid financing and payments is needed.