The federal government sets broad federal requirements for Medicaid— such as requiring that state Medicaid programs cover certain populations and benefits—and matches state Medicaid expenditures with federal funds for most services. States administer their respective Medicaid programs on a day-to-day basis, and have the flexibility to, among other things, establish provider payment rates and cover many types of optional benefits and populations. Section 1115 demonstrations provide a further way for states to innovate in ways that fall outside of many of Medicaid’s otherwise applicable requirements, and to receive federal matching Medicaid funds for costs that would not otherwise be matchable. For example, states may use these demonstrations to test new approaches for delivering care to generate savings or efficiencies or improve quality and access. Such changes have included expanding benefits to cover populations that would not otherwise be eligible for Medicaid, altering the state’s Medicaid benefit package, or financing payment pools, for example, for state-operated health programs or supplemental provider payments. Demonstrations are typically approved for an initial 5-year period that can be renewed for future demonstration periods. Some states have operated some or all of their Medicaid programs for decades under section 1115 demonstrations. Each demonstration is governed by STCs, which reflect the agreement between CMS and the state. The STCs include any provisions governing spending under the demonstration. For example, STCs indicate for what populations and services funds can be spent. In states receiving approval to implement payment pools for state health programs and supplemental provider payments, the STCs could include parameters for payments under those pools. For example, they may require that payment pools be capped at certain levels. The STCs may also include criteria for providers to receive payments and protocols that states must have to ensure the appropriateness of the payments and allow CMS to review those payments. The STCs also include the limits on the amount of federal funds that can be spent on the demonstration—referred to as spending limits—and indicate how spending limits will be enforced. Finally, the STCs include the reporting requirements the state must meet. Reporting requirements—as contained in the STCs—may include regular telephone calls between the state and CMS, regular performance reports, and quarterly expenditure reports. The STCs outline what the state should include in each of these reports, which can vary by demonstration. CMS policy requires that section 1115 demonstrations be budget neutral to the federal government—that is, the federal government should spend no more under a state’s demonstration than it would have spent without the demonstration. Once approved, each demonstration operates under a negotiated budget neutrality agreement, documented in its STCs, that places a limit on federal Medicaid spending over the life of the demonstration. This limit is referred to as the spending limit. If a state exceeds the demonstration spending limit at the end of the demonstration period, it must return the excess federal funds. Spending limits can be a per person limit that sets a dollar limit for each Medicaid enrollee included in the demonstration in each month, a set dollar amount for the entire demonstration period regardless of the level of enrollment, or a combination of both. Spending limits are calculated by establishing a spending base and applying a rate of growth over the period of the demonstration. The spending base generally reflects a recent year of state expenditures for populations included in the demonstration, and the growth rate to be applied is generally based on the lower of a state-specific historical growth rate or a federal nationwide estimate. Different data elements may be required by CMS to assess a state’s compliance with the spending limit. For example, for a per person spending limit, which is generally a defined dollar limit per enrollee per month, CMS needs both expenditure and enrollment data to assess compliance with the spending limit. CMS is responsible for monitoring compliance with the STCs during the demonstration, including compliance with requirements around how Medicaid funds can be spent and spending limits. Monitoring efforts may include reviewing performance reports and quarterly financial reporting required under the STCs and discussing questions and concerns with the state. When a state seeks a renewal of a demonstration, that request offers CMS an opportunity to negotiate revisions to the STCs with the state, which could include changes to spending limits and reporting requirements. (See fig. 1.) States are required to report Medicaid expenditures, including expenditures under demonstrations, to CMS at the end of each quarter. CMS reviews these expenditures on a quarterly basis for reasonableness. If, during the expenditure review, CMS is uncertain as to whether a particular state expenditure is allowable, then CMS may withhold payment pending further review (referred to as a deferral). With regard to reporting on expenditures under demonstrations, the STCs dictate the level of detail that the state is required to include in the quarterly expenditure reporting. For example, they might require the state to report expenditures by population and by payment pool approved under the demonstration. Federal spending under section 1115 Medicaid demonstrations increased significantly from fiscal year 2005 through fiscal year 2015, rising from $29 billion in 2005 to over $100 billion in 2015. Federal spending on demonstrations also increased as a share of total federal Medicaid spending during the same period, rising from 14 percent of all federal Medicaid spending in fiscal year 2005 to 33 percent in fiscal year 2015. (See fig. 2.) Several factors likely contributed to these trends. First, the number of states with demonstrations increased during this period, with 31 states reporting demonstration expenditures in fiscal year 2005 and 40 reporting such expenditures in fiscal year 2015. Second, some states expanded their demonstrations over this period, with demonstration spending in 24 states representing a greater proportion of total Medicaid spending in fiscal year 2015 than in fiscal year 2005. For example, CMS officials told us that, during this period, some states shifted expenditures for managed care and home and community based services from other Medicaid authorities to section 1115 demonstrations. In addition, during 2010 through 2015, a number of states expanded coverage through demonstrations to low-income adults, which, as CMS officials told us, likely contributed to the increase in demonstration spending. Demonstration spending as a proportion of total federal Medicaid spending varied across states and represented most—75 percent or more—of Medicaid spending in 10 of the 40 states that reported expenditures in fiscal year 2015. (See fig. 3.) Further, in 5 of these 10 states, demonstration spending represented more than 90 percent of the state’s total federal Medicaid spending. In contrast, in fiscal year 2005, spending under demonstrations did not exceed 75 percent of total Medicaid spending in any state. In that year, demonstration spending represented between 25 percent and 75 percent of total Medicaid spending in 10 states and less than 25 percent in 21 states. (See app. I.) The extent to which demonstration spending changed over time varied across states, as illustrated by the most recent 5 years of spending data in our selected states. In two of our four selected states—California and Indiana—spending under demonstrations increased between fiscal years 2011 and 2015, consistent with the national trend. (See table 1.) California’s demonstration spending increased the most significantly— more than tripling—during this time frame, during which the state expanded its demonstration to, among other things, provide coverage to low-income adults. Indiana reported a 22 percent increase in demonstration spending between fiscal years 2011 and 2015. In contrast, Tennessee reported a 3 percent decrease during that period. With regard to the change in the proportion of total Medicaid spending that demonstrations represented, the proportion did not change between 2011 and 2015 for Indiana and Tennessee and doubled in California, from a quarter of its total Medicaid expenditures in 2011 to half of its total Medicaid expenditures in 2015. We could not assess the change in spending for the fourth state—New York—because the state’s expenditure reporting for fiscal year 2015 was incomplete. We found that CMS took a number of steps to monitor demonstration spending in our selected states. For example, CMS held calls with states and performed various steps to assess the appropriateness of expenditures. Held monitoring calls. CMS and state officials told us that they held monitoring telephone calls to discuss any significant current or expected developments in the demonstrations. CMS officials confirmed they may use the calls to obtain information to supplement their review of states’ performance and expenditure reports. For example, CMS officials said they used the calls with Tennessee to raise questions about the content of the state’s submitted quarterly reports. In addition, California officials told us that CMS used these calls to get updates and supporting documentation on state programs. Checked for the appropriateness of expenditures. In reviewing the quarterly expenditure reports, CMS officials told us that they assessed the appropriateness of expenditures. For example, the agency checked that the amounts claimed complied with federal requirements for matching funds. As a result of these checks, CMS issued several deferrals to withhold payment of federal funds to California until the state could account for expenditures claimed. Officials also told us that as part of the checks, they assessed the appropriateness of pool payments, such as those for supplemental payments to providers, where relevant. Assessing the appropriateness of pool payments involves ensuring that pool payments align with the approved purposes of the pool and that the payments were made to approved providers. For example, CMS officials told us that for one of the pools in the New York demonstration, agency staff checked whether the payments made were to eligible providers, the requirements of which were described in the STCs. As a result of this review, CMS deferred providing over $38 million in federal funds to New York for payments made to providers under the pool in the quarter ending March 31, 2016, until the state could provide documentation that the providers were eligible to receive payment. CMS officials also told us that they checked to ensure that the state was not receiving funds from other federal funding sources that are intended to serve the same purposes as funds in their payment pools (i.e., duplicating federal funds), and that the state’s share of funding for the pools is from permissible sources, such as the state’s general revenue. According to CMS officials, as a result of the agency’s checks of spending for New York’s demonstration, CMS identified $172 million in federal funds that were inappropriately used to finance the state share of demonstration costs. CMS recovered these funds in fiscal year 2015. However, we also found inconsistencies in CMS’s monitoring process that potentially limited the effectiveness of the agency’s monitoring efforts in the selected states. The inconsistencies included the following: Reporting requirements were sometimes insufficient to provide information needed to assess compliance with spending limits. CMS did not consistently require states to report the elements needed for the agency review staff to compare actual demonstration spending to the spending limit. For example, although CMS needs states to report the number of enrollees per month—referred to as member months—to assess compliance with per person spending limits, the agency only required such reporting for two of the four selected states’ demonstrations. CMS acknowledged that having member month data is important to assess spending limit compliance. For example, CMS did not require California to report enrolled member months for its demonstration from 2010 to 2015, but the agency amended the STCs to include this requirement when the state’s demonstration was renewed beginning in 2016. Including this requirement will prevent CMS from having to use alternative means to gain necessary information for this compliance assessment. For example, CMS officials said that they have used monitoring calls to obtain the missing enrollment information from the state. Enforcement of expenditure reporting requirements was inconsistent. We found that the selected states did not report demonstration expenditures in all of the categories specified under their demonstration STCs. For example, California’s expenditure reporting did not align with the STC reporting requirements for 2010 through 2015. California officials told us this was largely because CMS had not enforced the reporting requirements prior to 2015. Therefore, based on our review, CMS would not be able to assess compliance with the spending limit for California using the data included in its expenditure report, if CMS tried to do so. Monitoring compliance with spending limits was inconsistent. CMS did not consistently assess compliance with the spending limit in all our selected states. CMS officials told us that they assessed compliance with the spending limits on a quarterly basis for the demonstrations in Tennessee and Indiana. However, the agency did not regularly assess compliance for the California and New York demonstrations—which represented tens of billions of dollars in federal spending annually—due to limitations in the state-reported expenditure data. CMS officials told us that they did not assess California’s compliance with the spending limit because the expenditure data submitted by the state was not accurate. Furthermore, the agency’s focus was on resolving a number of broader financial compliance issues in the state (see sidebar), the resolution of which, according to officials, was necessary before the agency could assess compliance with the spending limit. With regard to New York, CMS had not assessed compliance with the spending limit since 2011, because the state’s reporting of expenditures has been significantly incomplete since then. According to CMS officials, significant staff transitions disrupted New York’s ability to report expenditures to CMS as required. The state delayed reporting expenditures, and it did not report them in the categories specified in the STCs. Although CMS did not assess compliance with the spending limit for either of these two states, officials told us that they were not concerned that California or New York exceeded their spending limits because the limits in those states have historically been higher than actual spending. These inconsistencies may have resulted, in part, from CMS’s lack of written, standard operating procedures for monitoring spending under demonstrations. For example, CMS does not have internal guidance on the elements that must be included in reporting requirements for states. In addition, regarding the state performance reports, CMS does not have a review protocol or a requirement that staff check that reports contain the elements required by the STCs, for example, enrollment data needed to assess a state’s compliance with the spending limit. CMS has written materials to train staff on how spending limits are set and how demonstration spending is monitored. However, these materials are limited to high-level descriptions of the monitoring roles and do not contain specific procedures for staff to use in monitoring. Regarding the review of quarterly expenditure reports, CMS has guidance for agency staff who review them, but the guidance lacks detailed direction on what checks of demonstration expenditure data should occur. CMS also lacks standard procedures for documenting its monitoring efforts. For example, the agency has no written requirements for its staff to document that required performance reports have been submitted by the states. Furthermore, the agency does not require its staff to document the content of monitoring calls, including any concerns and potential resolutions discussed. In addition, CMS does not require its staff to systematically document checks performed for state compliance with demonstration spending limits or the appropriateness of pool payments. According to CMS officials, while there are not written requirements to do so, there is an expectation that staff maintain documentation of their monitoring efforts. However, officials also told us that any documentation of checks that a demonstration complied with its spending limits is likely included in the personal notes of individual CMS staff. As such, they may not necessarily be accessible to all staff who have oversight responsibility of the demonstration. One example of evidence we observed of CMS documenting its monitoring efforts was when checks for appropriateness of expenditures resulted in a deferral of federal funds, which were documented in letters to the states. CMS officials told us that they are in the early stages of developing standard operating procedures and a management information system to better standardize the monitoring of demonstrations: Standard operating procedures. CMS officials told us that they are developing protocols for monitoring state demonstration programs and state compliance with demonstration spending limits. Officials told us that the protocols would outline staff roles and responsibilities. Officials also told us that they are working on standardizing the format and content of required state performance reports, which could help ensure that CMS is receiving the information needed to monitor spending under the demonstration. As of December 2016, CMS officials expected that the first phase of standard procedures, which will focus on assessments of compliance with the spending limit, will be developed and documented in the next year. They explained that developing the procedures is an iterative process and that it could take the agency 2 years to completely develop and document its plans. Management information system. CMS officials also told us that they are in the initial phases of building a management information system to facilitate and document demonstration oversight. The first part of the system, which was in use as of September 2016, allowed CMS to centralize the collection of state demonstration performance reports. In future phases of system development, officials told us that the system will include alerts for missing reports or incomplete reviews and prompts for CMS’s staff to document completion of monitoring checks. CMS also plans for the system to include a database of demonstration STCs that CMS staff can search, which could help to ensure that STCs consistently include necessary reporting requirements. It is too early to determine how well CMS’s planned standard operating procedures and management information system will address the inconsistencies in its demonstration monitoring process. CMS officials did not have any written documentation regarding the agency’s plans as of December 2016. As such, it was unclear, for example, whether the procedures and new system would include mechanisms to ensure that STCs consistently require states to report the information needed for CMS to assess compliance with the spending limits. In addition, it was unclear if the procedures or new system would ensure that agency staff regularly check that expenditure reporting complies with reporting requirements. CMS officials said they intend for the procedures and new system to include mechanisms to ensure consistency in those areas. Federal internal control standards require that federal agencies design control activities to achieve objectives and respond to risks, and that agencies implement control activities, including documenting the responsibilities for these activities through policies and procedures. Without standard procedures for monitoring demonstration spending and documenting those efforts, CMS faces the risk of continued inconsistencies in monitoring and the risk that it may not identify cases where states may be inappropriately using federal funds or exceeding spending limits. CMS’s policy for applying demonstration spending limits has allowed our selected states to accrue unused spending authority under the demonstration spending limit (referred to in this report as unspent funds) and use it to expand demonstrations to include new costs. According to CMS officials, under long-standing policy, if a state spends less than the spending limit, the agency allows the state to accrue the difference between actual expenditures and the spending limit and carry forward the unspent funds into future demonstration periods. CMS allowed our selected states to use unspent funds to expand the demonstration by, for example, financing care for additional eligibility groups or additional supplemental payments. For example, according to CMS officials, Indiana accrued $600 million in unspent state and federal funds during the first demonstration period and was using a portion of that—approximately $2 million a year—to finance care for a small group of beneficiaries with end- stage renal disease in a subsequent period of the demonstration. CMS allowed New York to use $8 billion in accrued unspent federal funds from previous demonstration periods to expand its demonstration by including a new supplemental payment pool for incentive payments to Medicaid providers, costs that would not have been eligible for federal matching funds outside of the demonstration. If a state were to exceed its spending limit in a demonstration period, the agency allows it to draw upon unspent funds from previous demonstration periods to cover demonstration expenses, which, according to CMS officials, is consistent with the budget neutrality policy, under which spending limits are enforced over the life of the demonstration including any extensions beyond the initial 5-year term. The flexibility afforded to states in their accrual and use of unspent funds may explain, in part, why CMS has infrequently found that states exceed spending limits. Agency officials told us the agency has only withheld federal funds once as a result of a state exceeding its spending limit. Specifically, in 2007, CMS found that Wisconsin exceeded its demonstration spending limit and required the state to return $10.2 million to the federal government. Among our selected states, we found that states could accrue significant amounts of unspent funds. For example, CMS officials estimated that New York and California accrued billions of dollars in unspent funds. Based on our analysis, we found that Tennessee accrued approximately $11.6 billion in unspent funds over 3 years. (See fig. 4) According to CMS officials, growth in health care costs has proven lower than the agency and states assumed when setting the spending limits, resulting in spending that consistently falls below spending limits across demonstrations. In past work, we found that HHS had approved spending limits that were higher than the budget neutrality policy suggested. Among other concerns, we reported that HHS allows methods for establishing the spending limit that may be inappropriate—including application of inappropriately high growth rates—and may result in excessively high spending limits. For example, we found four demonstrations where the spending limits were a total of $32 billion higher than they should have been for the demonstration periods, typically 5 years. In May 2016, CMS communicated to states that the budget neutrality policy had been revised to, among other things, restrict the accrual of unspent funds to better control demonstration costs. Specifically, for demonstrations renewed starting in January 2016, CMS restricts the amount of unspent funds states can accrue over time in two ways. First, when states apply to renew their demonstrations, they can only carry over unspent funds from the past 5 years of the demonstration. Second, for demonstrations renewed through 2021, CMS limits the amount of unspent funds states can accrue each year in the renewal period. Specifically, after a state’s initial 5-year demonstration period, the amount of expected unspent funds that a state can accrue is reduced by 10 percent per year, until states can only accrue 25 percent of expected unspent funds under the spending limit. For example, a state renewing its demonstration after completing its first 5-year demonstration period would be able to keep 90 percent of the unspent funds it would accrue under the spending limit in the sixth year of the demonstration—which is the first year of the renewal period—80 percent in the seventh year, and so on. States that had renewed previously would experience further restrictions until the 13th year of the demonstration, at which point a state would be limited to accruing 25 percent a year. For demonstration renewals starting in 2021, states will still be limited to carrying over 5 years of unspent funds, but the percentage restrictions will be replaced with different requirements that could lower spending limits. Specifically, CMS will require states to submit new cost estimates using recent cost data (i.e., to rebase their cost projections). Those new cost projections, subject to adjustment, would become the basis of spending limits for the renewal period. To the extent that using more recent cost data results in spending limits that more closely reflect actual costs— which have proven lower than assumed by states and CMS when setting the spending limit—this requirement may lower spending limits and accordingly may reduce the unspent funds that states accrue under those limits. As of mid-December 2016, CMS was in the early stages of implementing the restrictions, having approved six demonstration renewals under the revised policy—those for Arizona, California, Massachusetts, New York, Tennessee, and Vermont. The updated STCs for the new demonstration periods in each state limited the states’ access to unspent funds to the last 5 years and reduced the amount of unspent funds the states can accrue over the next 5 years. For example, under the revised policy, California’s expected accrued unspent funds over its next demonstration period will be reduced by approximately $15 billion. (See fig. 5.) The effectiveness of the revised policy in controlling costs will depend, in part, on whether CMS consistently implements the revisions. We found two weaknesses that could lead to inconsistent application. Lack of formal guidance. CMS released a slide presentation on the revised policy during a teleconference with all states but has not issued formal guidance. CMS made the slides available on the agency’s website, but they were not included in the database of guidance—typically letters—for state Medicaid directors. CMS officials told us that there was no plan to issue additional guidance to states. Although the slides detail how unspent funds will be reduced, without formal guidance, it is unclear whether CMS will consistently apply these new requirements during demonstration renewals. Inconsistent tracking of unspent funds. We found that CMS was not consistently tracking unspent funds under the spending limits in our selected states, which makes it difficult for CMS to ensure the unspent funds are reduced by the amount specified under the new policy. For example, New York had not provided the financial reporting CMS needed to calculate the state’s actual costs for the different eligibility groups covered by the demonstration or its accrued unspent funds, even though there were specific spending limits for these different groups. As a result, CMS could not track unspent funds in the state. CMS officials told us the agency required New York to produce that information as part of the application for renewing the state’s demonstration. Similarly, the agency did not have actual costs for California’s demonstration, given California’s lack of reporting as specified under the STCs, and required the state to provide that information under its renewed demonstration. CMS officials told us the standard operating procedures, as noted above, that the agency is developing for monitoring demonstrations will reflect the revisions to CMS’s budget neutrality policy. It is too soon to determine if these procedures will ensure consistent tracking of unspent funds because, as we noted earlier, there was no documentation of the agency’s plans for these procedures as of December 2016. Federal internal control standards require that federal agencies should design control activities to achieve objectives. Control activities like formal guidance and standard procedures that clarify the application of agency policies help ensure that those policies—such as the revised budget neutrality policy—are consistently carried out in achieving cost control objectives. Without addressing potential weaknesses, including the lack of formal guidance and the lack of consistent tracking of unspent funds across all demonstrations, CMS may not be able to effectively implement the policy and achieve its related cost-control objectives. Medicaid section 1115 demonstrations are an important tool for states to test new approaches to delivering care that, among other things, may be more cost effective. However, the growing federal expenditures for demonstrations—now at over $100 billion a year—for costs that, in some cases, would not otherwise be eligible for Medicaid funding makes monitoring of those dollars critical. While our work found that CMS was monitoring demonstration spending in our selected states, the agency’s process also raised concerns. CMS’s lack of standard procedures for its monitoring process has contributed to insufficient reporting requirements for states and inconsistent enforcement of those requirements. Insufficient reporting can create a barrier to monitoring efforts, including assessing compliance with spending limits. Inconsistent enforcement might allow compliance issues to go undetected for extended periods of time, which, as demonstrated by the issues in California and New York, can take years to resolve. A key principle for demonstrations has long been the policy that they must be budget neutral to the federal government. Whether demonstrations adhere to that principle depends both on how CMS approves and applies spending limits during the demonstration. We have raised concerns in the past about demonstration approvals, including that in some cases spending limits for demonstrations were set too high. Our current work found that as a result of high spending limits, states are accruing significant amounts of unspent funds under the spending limits and using those funds to finance expansions of the demonstration. CMS’s move under the revised budget neutrality policy to begin restricting the amount of unspent funds that states can accrue is a positive step toward the agency’s goal of better controlling demonstration costs. However, states may continue to accrue significant amounts of unspent funds. Without standard procedures for tracking these funds, CMS will not be able to effectively enforce the limits on those funds. Further, without formal guidance on the revised policy, it is unclear whether CMS will consistently apply the policy. To improve consistency in CMS oversight of federal spending under section 1115 demonstrations, we recommend that the Secretary of Health and Human Services require the Administrator of CMS to take the following two actions: 1. Develop and document standard operating procedures for monitoring a. Require setting reporting requirements for states that provide CMS the data elements needed for CMS to assess compliance with demonstration spending limits; b. Require consistent enforcement of states’ compliance with financial reporting requirements; and c. Require consistent tracking of the amount of unspent funds under demonstration spending limits. 2. Issue formal guidance on the revised budget neutrality policy, including information on how the policy will be applied. We provided a draft of this report to HHS for review and comment. HHS concurred with our first recommendation that the agency should develop and document standard operating procedures for monitoring demonstration spending. In its response to this recommendation, HHS added that the department is developing infrastructure and procedures to better support demonstration monitoring. HHS did not explicitly agree or disagree with the second recommendation that the agency should issue formal guidance on the revised budget neutrality policy and how it will be applied. In its response to this recommendation, HHS noted that the new policy is being incorporated into new budget neutrality workbook templates and monitoring procedures, which will be used by the states and reviewers. The agency stated that it will determine if additional guidance is needed as implementation continues. Given the importance of this policy in controlling demonstration costs, we believe that developing formal guidance is necessary to ensure consistent application. HHS also provided technical comments, which we incorporated as appropriate. HHS’s comments are reprinted in appendix II. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the Secretary of Health and Human Services, appropriate congressional committees, and other interested parties. The report is also available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-7114 or iritanik@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix II. Total Medicaid expenditures (millions) Expenditures for demonstrations (millions) Total Medicaid expenditures (millions) Expenditures for demonstrations (millions) Total Medicaid expenditures (millions) Expenditures for demonstrations (millions) Total Medicaid expenditures (millions) Expenditures for demonstrations (millions) In addition to the contact named above, Susan Barnidge (Assistant Director), Jasleen Modi (Analyst-in-Charge), Shamonda Braithwaite, Elizabeth Miller, and Giao N. Nguyen made key contributions to this report. Also contributing were Giselle Hicks, Laurie Pachter, and Emily Wilson.

Summary: As of November 2016, 37 states had demonstrations under section 1115 of the Social Security Act, under which the Secretary of HHS may allow costs that Medicaid would not otherwise cover for state projects that are likely to promote Medicaid objectives. By policy, demonstrations must be budget neutral; that is, the federal government should spend no more for a state's Medicaid program than it would have spent without the demonstration. CMS is responsible for monitoring spending and assessing compliance with demonstration terms and conditions for how funds can be spent and applying spending limits to maintain budget neutrality. GAO was asked to examine federal spending for demonstrations and CMS's oversight of spending. This report examines (1) federal spending over time, (2) CMS's monitoring process, and (3) CMS's application of spending limits. GAO reviewed federal expenditure data for fiscal years 2005-2015, relevant documentation for 4 states, selected based on variation among their demonstrations, and federal internal control standards, and also interviewed CMS and state Medicaid officials. Over the last decade, federal spending under Medicaid section 1115 demonstrations, which allow states flexibility to test new approaches for delivering Medicaid services, has increased significantly. The Centers for Medicare & Medicaid Services (CMS), within the Department of Health and Human Services (HHS), took a number of steps to monitor demonstration spending in GAO's 4 selected states. However, GAO also found inconsistencies in CMS's monitoring process. For example, CMS did not consistently require selected states to report the information needed to assess compliance with demonstration spending limits. The inconsistencies may have resulted from a lack of written standard procedures. CMS officials told GAO that CMS was developing procedures to better standardize monitoring, but did not have detailed plans for doing so. Thus, it is too soon to determine whether these efforts will address the inconsistencies GAO found. Federal standards require that federal agencies design control activities to achieve objectives. Without standard, documented procedures, CMS may not identify cases where states are inappropriately using federal funds or exceeding spending limits. In applying demonstration spending limits, CMS allowed states to accrue unspent funds (more specifically, unused spending authority) when state spending is below the limit and use them to finance expansions of the original demonstration. For example, CMS allowed New York to use $8 billion in unspent federal funds to expand its demonstration to include an incentive payment pool for Medicaid providers. In May 2016, CMS released a slide presentation outlining new restrictions on the accrual of unspent funds. Per federal standards, formal guidance helps ensure that policies are consistently carried out. However, CMS has not issued formal guidance on the policy and does not consistently track unspent funds under the spending limit, raising questions as to whether the revised policy will be effective in better controlling costs. GAO recommends that CMS (1) develop and document standard operating procedures for sufficient reporting requirements and to require consistent monitoring and (2) issue formal guidance on its revised policy for restricting accrual of unspent funds. HHS agreed with GAO's first recommendation and neither agreed nor disagreed with GAO's second recommendation.