Medicaid—a federal-state partnership that finances health care for low- income individuals, including children, families, the aged, and the disabled—provided health coverage for over 60 million individuals in 2007. Title XIX of the Social Security Act established Medicaid as a joint federal- state program. States operate their Medicaid programs by paying qualified health care providers for a range of covered services provided to eligible beneficiaries and then seeking reimbursement for the federal share of those payments. Within broad federal requirements, 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 details the populations a state’s program serves, the services the program covers (such as physician services, nursing facility care, and inpatient hospital care) and the methods for calculating payments to providers. The state Medicaid plan also describes the supplemental payment programs administered by the state. Medicaid is an open-ended entitlement program, under which the federal government is obligated to pay its share of expenditures for covered services provided to eligible individuals under a state’s federally approved Medicaid plan. A state may collect up to 60 percent of its Medicaid share from local governments as long as the state government itself contributes at least 40 percent. Local governments and local government providers can contribute to the state share of Medicaid payments in certain ways, for example, through intergovernmental fund transfers. DSH payments supplement standard Medicaid payment rates to help offset certain hospitals’ unreimbursed costs. Under federal Medicaid law, each state receives an annual DSH allotment. DSH allotments are the maximum amounts of federal matching funds each state is permitted to claim for DSH payments. States’ DSH allotments were first established in 1991 based on each state’s historical DSH spending. States are required to make DSH payments to hospitals that treat a disproportionate share of low-income and Medicaid patients. Federal Medicaid law caps the amount of DSH funding a state may pay to an individual hospital each fiscal year: DSH payments cannot exceed the unreimbursed cost of furnishing hospital services to Medicaid beneficiaries and the uninsured. In determining a hospital’s unreimbursed costs, states must offset costs with all Medicaid payments received by the hospital, including any UPL payments. In other words, UPL payments count against a hospital’s DSH cap. A state may establish one or more DSH programs to make DSH payments, subject to these limits, and each program must be documented by the state and approved by CMS in the state’s Medicaid plan. As with other Medicaid program changes, to change or initiate a new DSH program, a state must submit a state plan amendment to CMS for review and approval prior to implementation. In contrast to DSH payments, states are not required to establish non-DSH supplemental payments for providers. Federal Medicaid regulations establish the UPL as an upper limit on federal reimbursement for Medicaid payments. UPL payments are a product of the gap between standard Medicaid payment rates and the UPL: in practice, states’ standard Medicaid payments are often less than the UPL, so states have established supplemental payment programs to make supplemental payments above standard Medicaid rates but within the UPL. UPL payments are approved by CMS in states’ Medicaid plans. For example, a state might establish a UPL program to provide additional payments to certain nursing facilities that serve low-income populations to fill the gap between what standard Medicaid rates pay toward the cost of services and higher payments permitted through the UPL. Some states, including California and Massachusetts, have also in recent years been allowed to make supplemental payments under Medicaid demonstrations. To obtain the federal matching funds for Medicaid payments made to providers, each state files a quarterly expenditure report to CMS. This expenditure report, known as Form CMS-64, compiles state payments in over 20 categories of medical services, such as inpatient hospital services, outpatient hospital services, mental health services, nursing facility services, and physician services. The CMS-64 expenditure report captures some information on supplemental payments. For example, states are required to report their total DSH payments to hospitals and mental health facilities separately from other Medicaid payments in order to receive federal reimbursement for them. States are not, however, required to report disaggregated information on DSH payments made to individual providers in order to obtain federal matching funds. Instead, states are required to maintain supporting documentation for DSH programs, including the amount of DSH payments made to each hospital, and to make this information available to CMS upon request. UPL payments are not reported separately from other payments for the purpose of obtaining federal matching funds. Reporting of supplemental payments under Medicaid demonstrations can vary by demonstration. Much attention has been focused on Medicaid supplemental payments, in part because of concerns that we and others have raised about inappropriate Medicaid supplemental payment arrangements between states and certain providers. From 1994 through 2007, we issued reports on various arrangements whereby states received federal matching funds by making large supplemental payments to certain government providers, such as county-owned nursing facilities, in amounts that greatly exceeded standard Medicaid rates. The payments were often temporary, since some states required government providers to return all or most of the money to the state government. States used the federal matching funds received for these payments at their own discretion, in some cases to finance or pay for the state’s share of the Medicaid program. Since the late 1980s, a variety of regulatory or legislative actions have been taken at the federal level to curb inappropriate Medicaid financing arrangements involving excessive supplemental payments. (See table 1.) In addition to the regulatory and legislative actions referenced in table 1, CMS has taken additional steps to improve Medicaid’s financial management and its oversight of states’ supplemental payment programs. These include making internal organizational changes that centralize the review of state plan amendments, hiring additional staff to analyze each state’s Medicaid program, and increasing the scrutiny of states’ Medicaid supplemental payment programs and the programs’ financing methods. In August 2003, CMS launched an oversight initiative to review and evaluate the appropriateness of states’ Medicaid payments as part of its efforts to strengthen financial oversight and the fiscal integrity of the Medicaid program. Under the initiative, a state’s submission of a proposal to change provider payments in its state plan triggers CMS scrutiny of the appropriateness of any related payment arrangement. Through this initiative CMS had identified, as of August 2006, 55 supplemental payment programs in 29 states using financing arrangements in which government providers did not retain all the supplemental payments made to them and had taken actions to end these arrangements. In May 2007, CMS published a final rule in part to address concerns related to states’ inappropriate financing arrangements involving supplemental payments. Among other things, the rule, if implemented, would limit Medicaid reimbursement to certain providers operated by units of government to an amount that does not exceed the provider’s costs of providing Medicaid-covered services. Concerns were raised that the rule would harm certain providers. Congress placed a moratorium on this rule until May 25, 2008. CMS expenditure reports show that states and the federal government spent at least $23.48 billion on DSH and non-DSH supplemental payments in fiscal year 2006, with the federal share of these payments totaling at least $13.37 billion, but states did not provide complete information on non-DSH payments. States reported more than $17 billion in DSH payments and $6 billion in non-DSH supplemental payments in fiscal year 2006, but the non-DSH payment information was not complete as states did not report all of their payments. Since 2001, CMS has required states to report certain supplemental payments on a separate informational section of their expenditure reports, but states do not receive federal reimbursement based on this section of the expenditure reports. CMS officials said that they were updating reporting requirements to obtain better information on states’ supplemental payments. As of April 2008, specific implementation dates for these actions had not been established. CMS’s planned changes did not include requiring states to report facility- specific UPL payments, a gap we had identified in 2004 and recommended that CMS address. CMS expenditure reports show that states made $17.15 billion in DSH payments in fiscal year 2006, with the federal government reimbursing states $9.65 billion for its share of these payments. As illustrated in figure 1, 48 states and the District of Columbia reported making DSH payments, with total payments ranging from less than $1 million in Wyoming to over $3 billion in New York. The 10 states with the largest total DSH payments in fiscal year 2006 accounted for over 72 percent of the $17.15 billion nationwide total, and the five states with the largest total DSH payments—California, New Jersey, New York, Pennsylvania, and Texas—accounted for more than half of the nationwide total. CMS expenditure reports also showed that DSH payments as a percentage of states’ Medicaid payments varied. As illustrated in figure 2, DSH payments ranged from less than 1 percent to over 16 percent of state Medicaid payments. Appendix II lists each state’s total DSH payments in fiscal year 2006 and each state’s total as a proportion of the state’s Medicaid payments and of total nationwide DSH payments. CMS expenditure reports divide DSH payments into two categories of service: traditional inpatient and outpatient services, and inpatient and outpatient mental health services. The 2006 CMS expenditure reports indicate that states made about 80 percent of the total nationwide DSH payments ($13.48 billion) to hospitals for traditional inpatient and outpatient services, and about 20 percent of the payments ($3.66 billion) to hospitals for mental health services. (See fig. 3.) On 2006 CMS expenditure reports, states reported making $6.33 billion in non-DSH payments, mainly to hospitals and nursing facilities. The federal share of these payments was $3.73 billion. States are required to separately report expenditure data on non-DSH payments made under the UPL to CMS on an informational section of the CMS-64 expenditure report called the CMS 64.9I form, but not as a condition of receiving federal matching funds. On CMS expenditure reports, 28 states reported making non-DSH payments in fiscal year 2006 with total payments ranging from less than $10 million in Washington to over $1 billion in California. On the CMS 64.9I form, states report payments by category of service for state government, local government, or private providers. As illustrated in figure 4, the payments states made in fiscal year 2006 covered a range of medical services. Payments made for inpatient hospital services accounted for 74 percent of the non-DSH payments made by the states, with payments totaling $4.71 billion (including a federal share of $2.74 billion). Local government providers received the largest amount of the non-DSH payments, accounting for 59 percent of total payments. State government ($473) Physician group ($66) Mental health ($27) Other services ($57) See appendix II for more information on the non-DSH supplemental payments states reported to CMS. CMS expenditure reports do not capture all of the non-DSH payments made by states. The Urban Institute, a nonpartisan economic and social policy research organization, administered a survey of states’ 2005 supplemental payments. Of the 35 states responding to the survey, 29 reported that they had made non-DSH supplemental payments that year. Five states responding to the Urban Institute reported making non-DSH payments totaling over $1.5 billion in 2005, but did not report any non-DSH payments on their 2005 CMS 64.9I forms. Twenty-three states reported to both the Urban Institute and CMS that they made non-DSH payments, but the amounts reported were different. For example, 4 states reported non- DSH payments to the Urban Institute that were at least $100 million more than those they reported to CMS; in one case, the amount reported to Urban Institute was almost $879 million more than the amount reported to CMS. In addition, in our surveys of 5 states about their supplemental payments, the states reported more to us in non-DSH payments than they reported on their CMS 64.9I forms, including more than $2 billion in supplemental payments made under Medicaid demonstrations. Although some differences could be attributed to differences in how states interpreted the reporting requirements in each case, including whether they included supplemental payments made under Medicaid demonstrations, these discrepancies illustrate that the CMS 64.9I forms did not fully capture non-DSH supplemental payments made by states in fiscal years 2005 and 2006. Although states have been required to complete the CMS 64.9I form since 2001, states do not receive federal reimbursement based on this reported information. In February 2008, CMS officials told us the agency had planned two actions to improve reporting on Medicaid supplemental payments. As of April 2008, specific implementation dates for these actions had not been established. First, officials said that they were redesigning CMS expenditure reports, in part to improve reporting of supplemental payments, and were expecting to implement the new report format in summer 2009. CMS officials told us that in the redesigned report, states would be required to separately report UPL payments; that is, UPL payments would no longer be combined with standard Medicaid payments on the section of the expenditure report that states complete to receive federal reimbursement. CMS officials said that the redesigned report would provide a more accurate and complete source of information on states’ Medicaid supplemental payments. According to CMS officials, tentative plans for the redesigned report included requirements for states to report information on the distribution of supplemental payments by category of service. Second, officials said that a final rule implementing certain congressional mandates to establish new DSH reporting requirements is expected to be issued in 2008. Currently, states must apply a cap on DSH payments to individual hospitals under federal law, but states’ expenditure reports do not enumerate payments to individual DSH hospitals. In 2003, however, a law was enacted requiring states to report additional and more detailed information for each hospital receiving a DSH payment. In response, CMS issued a proposed rule in 2005. The proposed rule, if finalized, would require states to separately report detailed information on payment and costs—including standard Medicaid payments, DSH payments, UPL payments, and uncompensated care costs—for each hospital receiving a DSH payment. These reports would be separate from and in addition to states’ expenditure reports. CMS’s planned actions to improve reporting on supplemental payments will not address all gaps in state reporting of supplemental payments. The proposed rule, if finalized, would require states to report facility-specific UPL payments to DSH hospitals. However, states would not be required to report facility-specific payments made to hospitals that do not receive DSH payments or payments made to other types of providers. Further, while CMS officials told us they plan to redesign the expenditure report to require states to report information on UPL payments, they were not planning to require facility-specific reporting. CMS officials expressed concerns that this level of information could be burdensome to collect and unnecessary and said that CMS can request this level of reporting detail from states when they submit state plan amendments to CMS for review. In a 2004 report, we identified concerns with CMS’s lack of comprehensive information on states’ UPL payments—information that we believed was necessary to adequately oversee the payments, including monitoring for dramatic changes in payments, conducting timely reviews of states’ payments, and taking timely oversight actions. We recommended in that report that CMS improve state reporting by requiring all states to report UPL payments made to all providers and to report these payments on a facility-specific basis. CMS agreed with this recommendation but had not acted on it as of May 2008. The five states we surveyed—California, Massachusetts, Michigan, New York, and Texas—reported making supplemental payments totaling $12.3 billion in fiscal year 2006 through 15 DSH and 33 non-DSH programs, with about half of these payments made to hospitals classified as local government by the states. The five states reported broadly stated purposes for their programs that often focused on various categories of eligible providers serving individuals on Medicaid, with low incomes, or without insurance. About $7.4 billion in DSH payments and $4.9 billion in non-DSH supplemental payments were made to more than 1,500 providers, mainly to hospitals. In each state, supplemental payments were concentrated on a small proportion of providers, and some providers received payments through multiple programs. The five surveyed states reported making payments to 1,531 providers through a total of 48 supplemental programs in fiscal year 2006, including 15 DSH programs and 33 non-DSH programs. Four of the five states administered both DSH and non-DSH programs; one state, Massachusetts, reported having no DSH programs (see table 2). About $7.4 billion in DSH payments were made to 695 hospitals, or 50 percent of all hospitals in the four states, and $4.3 billion of the $4.9 billion in non-DSH payments were made to 1,069 nursing facilities and hospitals, or 13 percent of the nursing facilities and 39 percent of the hospitals in the five states. The five states’ supplemental programs were configured in various ways. One state, Texas, reported making all of its supplemental payments through three programs—one DSH program and two non-DSH programs, one directed toward large urban public hospitals and another for rural hospitals. California made supplemental payments through three DSH programs and nine non-DSH programs, often targeted to specific provider types (see table 3). Massachusetts reported that it did not administer a DSH program, but the state administered 15 non-DSH programs, which were also often targeted to specific provider types, such as one program titled “Safety Net Care Payments for Pediatric Specialty Hospitals and Hospitals with Pediatric Specialty Units.” See appendix III for a list of all supplemental payment programs through which the five states made payments in fiscal year 2006. The five states broadly described each program’s purpose in our survey. The purpose of DSH payments is well established under federal law and regulation: DSH payments provide compensation to hospitals for uncompensated care provided to Medicaid and uninsured individuals. States’ descriptions of their programs provided some details on the categories of hospitals that would receive DSH payments from each program. The purposes for DSH programs, as reported by the five states, included the following: providing supplemental reimbursement to public hospitals that serve a disproportionate number of Medicaid, indigent, and uninsured patients; providing health care services to low-income patients with special needs who are not covered under other public or private health care programs; providing additional DSH funding for hospitals and hospital systems that received less than a specified amount from one of the state’s other DSH pools; and ensuring access to services for indigent persons with serious mental illness requiring inpatient treatment. In contrast to DSH payments, non-DSH supplemental payments do not have a specific statutory or regulatory purpose. In some cases, the states’ reported purposes for their non-DSH programs were similar to those of the DSH programs in that they provided supplemental payments to hospitals serving Medicaid, indigent, or uninsured individuals, or a combination of these groups. The purposes of the non-DSH programs for hospitals and other providers, as reported by the five states, included the following: providing supplemental payments to most of the largest Medicaid hospital providers in the state; supplementing Medicaid payments to certain types of hospitals, such as rural hospitals, pediatric specialty hospitals, and hospitals operated by the state Department of Mental Health; ensuring access by Medicaid beneficiaries to high-quality hospital or reimbursing public health clinics for their cost of providing services to Medicaid beneficiaries; providing enhanced Medicaid payments for outpatient hospital trauma and emergency services to private hospitals meeting certain criteria; reimbursing public dental clinics for their cost of providing services to Medicaid beneficiaries; providing partial reimbursement of the debt service incurred on revenue bonds for the construction, renovation, replacement, or retrofitting of eligible hospitals; and encouraging providers to make available to Medicaid recipients the most advanced forms of medical diagnostic and treatment services available through university-based medical service systems. According to CMS officials, state Medicaid plans should specify the method by which payment amounts are calculated and how they are correlated with services provided to Medicaid beneficiaries or, in the case of DSH programs, to Medicaid beneficiaries or uninsured individuals. In some cases, we found that the state Medicaid plan sections establishing the states’ supplemental payments did not clearly identify how the payments would be calculated. CMS officials said that as part of its oversight initiative started in August 2003, CMS ensures during its state plan amendment review process that states demonstrate a link between the distribution of supplemental payments and Medicaid purposes, which would include uncompensated care in the case of DSH payments. Such vetting only occurs, however, as states establish new supplemental payment programs or make changes to established programs. Thus, not all state supplemental payment programs have been reviewed under CMS’s 2003 initiative. In the case of the 35 supplemental payment programs operated by the five states we surveyed that were approved under the states’ Medicaid plans, 6 programs (17 percent) had not been reviewed and approved by CMS through the state plan amendment process since the beginning of the oversight initiative that started in August 2003. State officials told us that these 6 programs had not been changed since CMS’s 2003 initiative or subject to review under the initiative. We were unable to determine from states’ documentation when 5 additional supplemental payment programs were most recently reviewed and approved by CMS. Of the $12.3 billion in total supplemental payments reported by the five states, $11.3 billion, or 92 percent, was made to hospitals and the remainder went to other types of providers, specifically nursing facilities, clinics, physician groups, and, in one state, managed care organizations. The states reported that local government providers received the majority (57 percent) of supplemental payments. Local government hospitals, in particular, received 51 percent of supplemental payments reported by the five states. In each of the five states, hospitals received a majority of the state’s total supplemental payments. (See fig. 5.) The five states reported making $7.4 billion in DSH payments and $3.9 billion in non-DSH payments (80 percent of all non-DSH payments) to hospitals, including psychiatric hospitals, in fiscal year 2006. Four of the five states reported making non-DSH payments to types of providers other than hospitals, such as managed care organizations, nursing facilities, clinics, and physician groups. Payments to these other types of facilities and providers totaled nearly $1 billion, including the following: $577 million paid to managed care organizations, $329 million paid to nursing facilities, $53 million paid to physician groups, and $19 million paid to clinics. See appendix IV for details on the distribution of each state’s DSH and non-DSH payments by provider type. All five states reported distributing supplemental payments to providers in each of three categories: state government, local government, and private providers. Overall, $6.9 billion, or 57 percent, of the total supplemental payments made by the five states in fiscal year 2006 were paid to local government providers. (See fig. 6.) At the individual state level, the distribution across categories varied. The proportion of payments made to local government providers, for example, ranged from a low of 20 percent in Michigan to a high of 73 percent in California. In California, Massachusetts, New York, and Texas, local government providers received the largest proportion of the state’s supplemental payments. Michigan reported that private providers received the largest portion (68 percent) of the state’s supplemental payments. See appendix IV for details on the distribution of each state’s DSH and non-DSH payments by ownership category. Of the total supplemental payments made by the five states in fiscal year 2006, states reported that $6.2 billion, or 51 percent, were made to local government hospitals, as illustrated in table 4. The distribution of payments by both provider type and ownership category differed from state to state. In three states—California, Texas, and New York—the majority of payments were made to local government hospitals. In Michigan, the largest portion of the state’s total supplemental payments— $572 million, or 48 percent of payments—was paid to private hospitals, and the second largest portion of the state’s supplemental payments—$238 million, or 20 percent of payments—was paid to private nursing facilities. In Massachusetts, the largest portion of the state’s supplemental payments—$679 million, or 42 percent of payments—was paid to private hospitals, and the second largest portion—$577 million, or 35 percent of payments—was paid to local government managed care organizations. Information from the five states shows that a small proportion of providers received a large proportion of each state’s supplemental payments. Specifically, the 5 percent of providers receiving the largest supplemental payments in individual states received between 53 percent and 71 percent of all Medicaid supplemental payments. (See fig. 7.) In two states, non-DSH supplemental payments were particularly concentrated: in New York, the top 5 percent of providers receiving non-DSH payments accounted for 91 percent of the total non-DSH payments, and in Texas, the top 5 percent of providers accounted for 76 percent of the total non-DSH payments. See appendix V for additional information on the concentration of supplemental payments reported by the five states. In the five surveyed states, 30 percent of the 1,531 providers receiving supplemental payments received payments from multiple programs, accounting for 69 percent of their supplemental payments. The percentage of providers receiving payments from multiple programs in each state ranged from a low of 17 percent in Massachusetts to a high of 65 percent in California. Some providers received substantial payments from more than one supplemental payment program. For example, in one state one hospital received $420 million in DSH payments and $154 million in non-DSH supplemental payments in fiscal year 2006. In another state one hospital received $173 million in DSH payments and $73 million in non-DSH supplemental payments that year. Appendix V provides additional information on the extent to which providers in five states received supplemental payments from multiple programs. Pressures on federal and state budgets have focused attention both on the importance of the Medicaid program and on its high costs. As a source of health care for the nation’s most vulnerable populations, Medicaid’s long- term sustainability is critical to millions of people. However, sustaining the $299 billion program will require ensuring that expenditures are appropriately limited to Medicaid purposes. Supplemental payment programs have historically been susceptible to abuse, particularly programs involving large payments to government providers that allowed states to inappropriately leverage federal Medicaid matching funds. Legislative, regulatory, and other agency actions have addressed some of these concerns. States made supplemental payments totaling at least $23 billion in fiscal year 2006, and the federal government spent over $13 billion in matching funds for these payments. Despite the significance of supplemental payments, CMS lacks complete information on states’ payments and has not reviewed all supplemental payment programs under its 2003 initiative. To provide effective oversight, federal officials need reliable and complete information, including information on all programs administered by states as well as information on the providers that receive payments from these programs. Complete information about the distribution of Medicaid supplemental payments, however, is still lacking at the federal level. For example, complete data on non-DSH payments and data on DSH and non- DSH supplemental payments made to individual providers are not available from CMS expenditure reports. Congress has long sought better information on DSH payments, including information on payments to individual providers, and we have expressed similar concerns over the lack of information related to non-DSH payments. CMS is planning to take action in 2008 to finalize a rule proposed in 2005 that would implement detailed DSH reporting in response to federal statutory requirements and also plans to make improvements to its expenditure reports to collect data on some non-DSH payments. These planned actions address many of the gaps in state reporting of supplemental payments and should be put into effect as soon as possible. Even when they are implemented, however, states will not be required to report all of the supplemental payments that they make to individual providers. We believe that a recommendation from our prior work that CMS improve state reporting of UPL payments, including collecting information on payments by facility, remains valid. Such an improvement could be achieved by establishing reporting requirements for non-DSH supplemental payments, such as collecting payment information on a facility-specific basis, comparable to those proposed for DSH payments. In 2004, CMS agreed with the recommendation that it improve its UPL reporting requirements and collect facility-specific payment information, but as of May 2008, had not implemented it. Furthermore, not all supplemental payment programs have been subject to CMS review through the oversight initiative that CMS began in 2003 to assess and ensure the appropriateness of state supplemental payments. Until reliable and complete information on states’ supplemental payments is available, federal officials overseeing the program and others will lack information they need to review payments and ensure that they are appropriately spent for Medicaid purposes. To improve the oversight of states’ Medicaid supplemental payments, we recommend that the Administrator of CMS take the following two actions: expedite issuance of the final rule implementing additional DSH reporting requirements, and develop a strategy to identify all of the supplemental payment programs established in states’ Medicaid plans and to review those programs that have not been subject to review under CMS’s August 2003 initiative. We provided a draft of this report to HHS for comment. In its response, HHS stated that CMS generally agreed with our recommendations to expedite issuance of the final DSH rule and to develop a strategy to review all state supplemental payment programs to ensure they are consistent with Medicaid requirements. HHS also identified a means by which it could implement our 2004 recommendation to request facility-specific information on UPL payments. HHS provided additional comments that it believed were critically important to the final report. HHS stated that the final rule implementing DSH payment reporting requirements will only collect facility-specific supplemental payment information for hospitals that qualify for DSH payments, and that hospitals that do not receive DSH payments and non- hospital Medicaid providers are not subject to the rule. We note that our draft report contained this information. Further, because of these and other data reporting limitations, we determined our 2004 recommendation that CMS improve its requirements for states for reporting UPL payments, such as requiring states to report payments on a facility-specific basis, was still valid. HHS said the volume of information that would be collected under this recommendation could not feasibly be transmitted through the Medicaid Budget and Expenditure System, a system states use to submit Medicaid expenditure data to CMS. We note that we have not specified the system by which improved UPL information should be collected. HHS also provided an example of one means it could use to obtain facility-specific information through its review of states’ Medicaid expenditure reports. In our view, the billions of dollars paid annually in non-DSH supplemental payments warrants improved reporting of information on payments comparable to planned DSH reporting requirements, including reporting of facility-specific payment information. HHS also noted that states are entitled each year to expend their entire allotment and that therefore, the $17 billion DSH spending referenced in the draft report will largely remain unchanged after issuance of the final DSH rule. Although improved reporting may not result in DSH savings, we maintain that having improved and audited data on DSH and other supplemental payments at the facility level is important to ensuring that facility-specific DSH limits are not exceeded and that payments are appropriate. In its general comments, HHS asserted that GAO had officially validated that a May 2007 final rule would address concerns related to the supplemental payment programs in this report. Some aspects of the May 2007 rule relate to concerns about supplemental payment programs raised in our past work. However, we have not assessed or reported on this final rule, and the extent to which the rule would address our past concerns will depend on how it is implemented. We also obtained technical comments from California, Massachusetts, Michigan, New York, and Texas, which we considered and 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 issuance 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) 512-7114 or cosgrovej@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 VII. This appendix describes in detail how we did our work for our review of states’ Medicaid supplemental payments to hospitals through states’ Disproportionate Share Hospital (DSH) programs and to providers through states’ other supplemental payment programs, permitted under Medicaid’s Upper Payment Limit (UPL) provisions or under Medicaid demonstration authority, which in this report we refer to as non-DSH programs. We reviewed states’ supplemental payments nationwide by examining Medicaid expenditures reported by states to the Centers for Medicare & Medicaid Services (CMS) on Form CMS-64. We also selected a nongeneralizable sample of five states and collected information about the supplemental payments made to providers from each of their supplemental payment programs. To determine what CMS Medicaid expenditure reports show regarding the amount and distribution of DSH and non-DSH payments, we examined the standardized expenditure reports states submit to CMS on a quarterly basis, Form CMS-64. States submit CMS-64 expenditure data electronically to the Medicaid Budget and Expenditure System and must certify that the data are correct to the best of their knowledge. We reviewed expenditure data provided to CMS from all states for fiscal year 2006, the most recent year for which complete data were available. We obtained fiscal year 2006 DSH payments from CMS’s Financial Management Report (FMR). The FMR summarizes each state’s quarterly expenditures reports as a fiscal year total. The FMR incorporates payment adjustments reported by the states. For non-DSH supplemental payments, we extracted expenditure data reported on the CMS 64.9I form, a section of the CMS expenditure report on which states are required to report non-DSH supplemental payments made under the UPL for informational purposes. CMS allows states to make adjustments to their prior CMS-64 submissions for up to 2 years. For DSH payments, the FMR for 2006 incorporated payment adjustments that had been reported through the end of fiscal year 2006. For non-DSH payments we incorporated payment adjustments to the CMS 64.9I forms submitted by the states through October 5, 2007. We compiled the amount of DSH and non-DSH payments reported by individual states and analyzed their distribution by category of service (such as inpatient hospital, mental health facility, or nursing facility) and by provider category (that states report as either state government, local government, or private), where those data were available. To assess the reliability of states’ CMS-64 submissions, we reviewed the steps CMS takes to ensure the accuracy of expenditure data submitted to the Medicaid Budget and Expenditure System. We also compared these expenditure data to data the five selected states submitted to us and compared the non-DSH expenditure data to similar data published by the Urban Institute. To understand CMS expenditure reports, Medicaid reporting requirements, and DSH and non-DSH supplemental payments, we conducted interviews with CMS officials and reviewed relevant laws, regulations, and guidance. We concluded that states’ reported DSH payments in fiscal year 2006 were sufficiently reliable for use in this report because CMS reimburses states based on these data and because CMS also reports these data publicly on its Web site. However, we determined that states’ reported data on non-DSH payments in fiscal year 2006 were less reliable than data on DSH payments. States are required to submit non- DSH payment information separately from, and in addition to, their base expenditures. CMS does not reimburse states on the basis of these data. We did not examine reporting requirements under specific states’ Medicaid demonstrations. We concluded that states’ reported fiscal year 2006 non-DSH payments were suitable for limited, descriptive purposes, and we noted the limitations of these expenditure data in the report. We also compared information on Medicaid supplemental payments provided to us by the five selected states (based on the selection criteria described below) with the information the states reported on CMS expenditure reports. Where we found major discrepancies, we noted them in the report and included state officials’ explanations for some of the differences. See appendix II for results of our analysis of CMS expenditure reports. To examine how Medicaid supplemental payments are distributed to providers and for what purposes, we surveyed a nongeneralizable sample of five states—California, Massachusetts, Michigan, New York, and Texas. We selected these states because they reported spending the largest amount on Medicaid supplemental payments in fiscal year 2005 based on the combined total of their DSH payments (as reported to CMS) and estimated non-DSH payments (imputed from data published by the Urban Institute). The five states each reported making more than $1.6 billion in estimated Medicaid supplemental payments in 2005. The estimated combined total of these states’ Medicaid supplemental payments accounted for more than 40 percent of the estimated fiscal year 2005 Medicaid supplemental payments for all states. Two of the five states, California and Massachusetts, operated Medicaid demonstrations that changed certain characteristics of their supplemental payment programs. In January 2008, we obtained information from each state about fiscal year 2006 DSH and non-DSH payments, including the amount of each payment, the name of the provider that received the payment, the provider’s type (such as hospital, nursing facility, or clinic), and the provider’s ownership category (state government, local government, or private). We also interviewed state officials about their Medicaid supplemental payments. To determine the purpose for programs, we asked states to provide a description of each supplemental payment program they operated, and assessed the state Medicaid plan provisions that describe the methods and standards used to calculate payments made from these programs. To assess the reliability of states’ reported payment amounts, we compared states’ reported payment information to CMS’s expenditure reports, and where we found major differences, we reported them. For other provider data reported by states, specifically, information on provider ownership category, we compared states’ data with provider data in CMS’s On-Line Survey, Certification, and Reporting system that contains information on the type of organization that operates the facilities. We provide examples of differences we found in states’ information as compared to CMS’s. Although the scope of this review did not include identifying the reasons for them, differences in payment amounts may be due to payment adjustments made after we extracted CMS data and states not reporting supplemental payments made under Medicaid demonstrations on the CMS 64.9I form. We have reported the information as reported to us by states. The findings from our nongeneralizable sample of five states cannot be used to make inferences about supplemental payment programs in other states. See appendixes III through V for the results of our analysis of the state-reported data. We conducted our work from October 2007 through May 2008 in accordance with generally accepted government auditing standards. This appendix provides payment information, by state, compiled from fiscal year 2006 CMS-64 expenditure reports. Table 5 provides the amount of DSH payments by state and also identifies for each state (1) the proportion of the state’s total Medicaid payments accounted for by DSH payments and (2) the proportion of nationwide DSH payments accounted for by the state’s DSH payments. Table 6 provides similar information, by state, for the non-DSH payments that 28 states reported to CMS for informational purposes on the CMS 64.9I form. We obtained information from each of the five states we surveyed on the supplemental payment programs they had in place in fiscal year 2006. We asked the states to provide information about each supplemental payment program they operated, including the program’s purpose; the providers that received payments and the amount of payment they received; and whether payments were made as lump-sum payments (for example, as a quarterly or annual payment made to a provider) or as an enhanced payment rate (an additional amount that is added to the individual payments made to providers for specific services). The five states reported making all payments in fiscal year 2006 as periodic lump sums. The purpose, number of providers receiving payments, and total payments made for each program are summarized in tables 7 through 11. California officials reported that in fiscal year 2006 the state paid nearly $4 billion in Medicaid supplemental payments through three DSH and nine non-DSH supplemental payment programs. Supplemental payments were made to hospitals and nursing facilities. Total payments through the programs ranged from $11 million to over $2 billion for DSH programs and from $8 million to over $1 billion for non-DSH programs. See table 7 for a description of each supplemental payment program administered by California. Massachusetts officials reported that in fiscal year 2006 the state paid over $1.6 billion in Medicaid supplemental payments through 15 non-DSH supplemental payment programs. Supplemental payments were made to hospitals, including psychiatric hospitals; managed care organizations; and a physician group. Four programs were in operation for only part of 2006: two of these programs were terminated at the end of the third quarter of fiscal year 2006 and two began at the start of the fourth quarter. On January 26, 2005, CMS approved a 3-year extension to the Medicaid demonstration in Massachusetts, the MassHealth demonstration. The demonstration, which was in effect during fiscal year 2006, created a Safety Net Care Pool, which represents the combined total of what Massachusetts had previously spent on DSH programs and supplemental payments to Medicaid managed care organizations. The state funded 10 non-DSH supplemental payment programs through the Safety Net Care Pool, some of which had been DSH programs prior to their inclusion in the demonstration. In addition to supplemental payments, Massachusetts funded its Commonwealth Care Health Insurance Program through the Pool. Under Commonwealth Care, the state provides premium assistance subsidies to private managed care organizations for providing sliding scale health insurance to previously uninsured people with low incomes and is part of the state’s transition from supplemental payments to providers to expanding coverage of individuals. See table 8 for a description of each supplemental payment program administered by Massachusetts. Michigan officials reported that in fiscal year 2006 the state paid over $1 billion in Medicaid supplemental payments through six DSH and five non-DSH supplemental payment programs. The state made supplemental payments to hospitals, including psychiatric hospitals; nursing facilities; clinics; and physician groups. See table 9 for a description of each supplemental payment program administered by Michigan. New York officials reported that in fiscal year 2006 the state paid over $3 billion in Medicaid supplemental payments through five DSH and two non-DSH supplemental payment programs. Supplemental payments were made to hospitals, including psychiatric hospitals, and nursing facilities. See table 10 for a description of each supplemental payment program administered by New York. Texas officials reported that in fiscal year 2006 the state paid over $2 billion in Medicaid supplemental payments through one DSH and two non-DSH supplemental payment programs. Supplemental payments were made only to hospitals. See table 11 for a description of each supplemental payment program administered by Texas. Officials from the five surveyed states reported making DSH and non-DSH supplemental payments in fiscal year 2006 to a variety of provider types (such as hospitals, nursing facilities, or physician groups) and provider ownership categories (state government, local government, or private). In fiscal year 2006, in total, the five states reported making $10.4 billion in payments to hospitals (85 percent of total payments), $852 million to psychiatric hospitals (7 percent), $577 million to managed care organizations (5 percent), $329 million to nursing facilities (3 percent), $53 million to physician groups (less than 1 percent), and $19 million to clinics (less than 1 percent). The five states made most payments (57 percent) to local government providers; payments to providers they categorized as owned by state governments accounted for 17 percent of the total supplemental payments made by the five states, and payments to private providers accounted for 26 percent of payments. Tables 12 and 13 show the distribution of each state’s fiscal year 2006 supplemental payments, by provider type and provider ownership category, respectively. Data from the five surveyed states showed that the states concentrated a large proportion of their DSH and non-DSH payments on a small percentage of providers and that over one-quarter of providers received payments from more than one supplemental payment program. In fiscal year 2006, the states reported making total supplemental payments of nearly $8 billion (63 percent of all supplemental payments) to 77 providers, which represented 5 percent of the providers receiving supplemental payments in the five states. Officials also reported that 452 providers—representing 30 percent of all providers receiving a supplemental payment in the five states—received payments from multiple programs. Seventy-one providers received payments from at least four programs, with payments exceeding $2.7 billion or 22 percent of the total reported supplemental payments in the five surveyed states. Table 14 shows the amount of each state’s fiscal year 2006 supplemental payments that were paid to the 5 percent of providers receiving the largest payments, and the remaining 95 percent of providers. Table 15 shows the number of providers that received payments from multiple supplemental payment programs and the amount of payment received. In addition to the contact named above, Katherine M. Iritani, Assistant Director; Susannah Bloch; Ted Burik; Tim Bushfield; Helen Desaulniers; Elizabeth T. Morrison; Tom Moscovitch; Perry Parsons; and Hemi Tewarson made key contributions to this report. 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: Long-Standing Concerns about Inappropriate State Arrangements Support Need for Improved Federal Oversight. GAO-08-255T. Washington D.C.: November 1, 2007. Medicaid Financing: Federal Oversight Initiative is Consistent with Medicaid Payment Principles but Needs Greater Transparency. GAO-07-214. Washington D.C.: March 30, 2007. High-Risk Series: An Update. GAO-07-310. Washington, D.C.: January 2007. Medicaid Financial Management: Steps Taken to Improve Federal Oversight but Other Actions Needed to Sustain Efforts. GAO-06-705. Washington D.C.: June 22, 2006. Medicaid: States’ Efforts to Maximize Federal Reimbursements Highlight Need for Improved Federal Oversight. GAO-05-836T. Washington D.C.: June 28, 2005. 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. Major Management Challenges and Program Risks: Department of Health and Human Services. GAO-03-101. Washington D.C.: January 2003. Medicaid: HCFA Reversed Its Position and Approved Additional State Financing Schemes. GAO-02-147. Washington D.C.: October 30, 2001. Medicaid: State Financing Schemes Again Drive Up Federal Payments. GAO/T-HEHS-00-193. Washington D.C.: September 6, 2000. Medicaid: States Use Illusory Approaches to Shift Program Costs to Federal Government. GAO/HEHS-94-133. Washington D.C.: August 1, 1994.

Summary: The financing of the $299 billion Medicaid program is shared between the federal government and states. States pay qualified providers for covered Medicaid services and receive federal matching funds from the Department of Health & Human Services' (HHS) Centers for Medicare & Medicaid Services (CMS) for expenditures authorized in their state Medicaid plans. In addition to these standard Medicaid payments, most states make supplemental payments to certain providers, which are also matched by federal funds. GAO was asked for information about Medicaid supplemental payments. GAO examined (1) what information states report about supplemental payments on Medicaid expenditure reports and (2) in selected states, how much was distributed as supplemental payments, to what types of providers, and for what purposes. GAO analyzed CMS's Medicaid expenditure reports and surveyed five states that make large supplemental payments. CMS Medicaid expenditure reports show that states made at least $23 billion in supplemental payments in fiscal year 2006, with the federal share of these payments totaling over $13 billion. States made $17.1 billion in payments through Disproportionate Share Hospital (DSH) programs, which under federal law provide additional reimbursement, up to a cap, to hospitals that serve large numbers of low-income individuals. In addition, states made at least $6.3 billion in non-DSH supplemental payments, including payments through Upper Payment Limit (UPL) programs, under which states make payments to providers up to the upper limit for obtaining federal matching funds. However, information on non-DSH supplemental payments was incomplete. The exact amount and distribution of fiscal year 2006 non-DSH payments to states are unknown because states did not report all their payments to CMS. CMS officials said that they were updating reporting requirements to collect better information on supplemental payments, including finalizing a rule proposed in 2005 responding to federal law that required states to report more detailed information on DSH payments and seeking improved UPL payment information. As of April 2008, specific implementation dates for these actions were not known. CMS's plans did not include a requirement that states report all UPL payments on a facility-specific basis, as GAO recommended in 2004 (See Medicaid: Improved Federal Oversight of State Financing Schemes Is Needed, GAO-04-228). GAO believes this 2004 recommendation remains valid. The five states GAO surveyed--California, Massachusetts, Michigan, New York, and Texas--reported making $12.3 billion in Medicaid supplemental payments in federal fiscal year 2006 through programs with broadly stated purposes, with half of these payments made to local government hospitals. Collectively, the five states reported making payments through 48 supplemental payment programs, with each state operating from 3 to 15 different programs that paid hospitals, nursing facilities, or other providers. The five states reported purposes for their programs that often focused on various categories of eligible providers serving individuals on Medicaid, with low incomes, or without insurance. The state Medicaid plan sections establishing the states' supplemental payments did not always clearly identify how the payments would be calculated. CMS officials said that as part of an oversight initiative started in 2003, CMS ensures that state plans demonstrate a link between the distribution of supplemental payments and Medicaid purposes. However, not all state supplemental payment programs have been reviewed under CMS's initiative. In each of the five states, supplemental payments were concentrated on a small proportion of providers: the 5 percent of providers receiving the largest amount of supplemental payments in individual states received from 53 percent to 71 percent of all supplemental payments. Some providers received substantial payments from more than one supplemental payment program.