Medicaid and SCHIP are the nation’s largest health-financing programs for low-income people, accounting for about $232 billion in federal and state expenditures in 2001 to cover about 40 million people. Medicaid was established in 1965 under title XIX of the Social Security Act to provide health care coverage to certain categories of low-income families and aged and disabled individuals. SCHIP was established in 1997 under title XXI of the Social Security Act to provide health care coverage to children living in low-income families whose incomes exceed the eligibility requirements for Medicaid. Both are federal-state programs whereby, within broad federal guidelines, states have considerable flexibility in whom and what they cover. Medicaid establishes a framework that states must follow in order to receive federal funding, known as federal matching payments, for a share of a state’s Medicaid program expenditures. States are required to cover certain groups of individuals and offer a minimum set of services, such as physician, hospital, and nursing facility services, as well as early and periodic screening, diagnostic, and treatment (EPSDT) services for individuals under the age of 21. States can also receive federal matching payments to cover additional optional groups of individuals. For example, while states are required to cover children under age 6 in families with incomes at or below 133 percent of the federal poverty level (FPL), children in families above this level may also be covered at a state’s option. States may also choose to provide optional services—such as vision and dental services and prescription drugs—but if they do so, they must provide the same benefits to all covered beneficiaries. At present, nearly two-thirds of Medicaid expenditures are for optional populations and services, largely for long-term care services. Medicaid is an open- ended entitlement, meaning the federal government will pay its share of state expenditures for people covered under a state’s approved Medicaid plan, and enrollment for those eligible cannot be limited. Like Medicaid, SCHIP is administered by states under broad federal guidelines to offer coverage to children in families with incomes up to 200 percent of the FPL who do not qualify for Medicaid. The federal government pays a higher share of states’ expenditures under SCHIP than under Medicaid. SCHIP programs must provide a benefit package that meets certain standards. In contrast to Medicaid, SCHIP is not an open- ended entitlement. The Congress in 1997 appropriated a fixed amount for the program—specifically, $40 billion in federal matching funds over 10 years (fiscal years 1998 through 2007) for SCHIP purposes. Annual allotments are made to states for use over a 3-year period and the Secretary is required to determine an appropriate procedure for redistributing the unused SCHIP funds to those states that have already spent their SCHIP allotments. In certain circumstances states may restrict enrollment if their allotment of federal funds has been expended, but to date, SCHIP spending for most states has fallen well below allotment levels for a variety of reasons. According to the Congressional Research Service, despite the fact that 42 states began their SCHIP programs in late 1997 or 1998, new programs take time to get off the ground and the participation rates have been lower than expected. Section 1115 of the Social Security Act gives the Secretary of HHS broad authority to (1) allow states to provide services or cover individuals not normally eligible for Medicaid and SCHIP, and (2) provide federal funds for services and populations not otherwise eligible for a federal match. Title XIX governing Medicaid is one of several titles to which section 1115 specifically applies, and the Congress, in establishing SCHIP, extended section 1115 to SCHIP “in the same manner” as it applies to Medicaid. According to one report, in 2001 more than 20 percent of total federal Medicaid spending was governed by section 1115 demonstration terms and conditions rather than usual Medicaid rules. Past demonstrations have significantly influenced the development of Medicaid policy, for example, by allowing states to restrict the enrollment of beneficiaries to managed care. The first statewide section 1115 waiver was approved for Arizona in 1982, requiring managed care for all beneficiaries and paying health plans a fixed amount per person to provide all covered services. Other examples of large-scale changes approved through waivers include programs begun in Oregon and Tennessee in the early 1990s. Recognizing its fiduciary obligations, HHS has since the early 1980s required that states justify that their section 1115 waiver demonstrations will not cost the federal government more money than the programs would have cost without the waivers. However, we have previously reported that section 1115 demonstration waivers approved for several states in the mid-1990s were not budget neutral. HHS’s HIFA initiative, using the section 1115 authority, gives states flexibility to increase cost sharing and reduce benefits for some program beneficiaries in order to help fund coverage for uninsured populations within existing Medicaid and SCHIP program resources. HIFA allows states to provide different benefit packages to different groups of people covered under the waiver. To be considered, proposals must be statewide and seek to coordinate coverage with private health insurance options for low-income uninsured individuals. Responding to states’ expressed concerns about HHS’s prolonged review process for pending waivers, HHS has promised more expedited reviews and decisions. To facilitate this, as part of its HIFA initiative HHS has developed a standard template for states to use in applying for the waivers. Like HIFA, the Pharmacy Plus initiative uses section 1115 waiver authority. The Secretary introduced the Pharmacy Plus initiative in January 2002 to encourage states to provide pharmacy benefits to low- income elderly populations. While HHS has described the initiative in budget and other documents, it has not published an application template and policy guidelines. Since HHS announced the HIFA initiative in August 2001, states submitted 13 proposals for section 1115 demonstration waivers designed to respond to HHS’s goals of covering more low-income uninsured individuals and expanding pharmacy benefits as of May 1, 2002. Eight of these 13 are designed to expand coverage for the uninsured, including 6 HIFA applications and 2 expansions that were not submitted in HIFA format, that is, using the HIFA template and following all of the HIFA principles. Five waivers proposed to expand pharmacy benefits, as envisioned by the Pharmacy Plus initiative. As of May 1, HHS had approved 4 of the proposals: 2 HIFA waivers for Arizona and California; an expansion offering primary and preventive care for the uninsured in Utah; and a pharmacy benefit waiver in Illinois. The remaining proposals were still under review as of early June 2002. HHS has approved four section 1115 demonstration waivers to expand coverage for the uninsured and pharmacy benefits since August 2001. Formal review times for three of these four waivers, which averaged just 3-½ months (109 days), ranged from 60 days for the Utah application to 182 days for the Illinois pharmacy demonstration. These review times compare with roughly 10 months’ review, on average, for approved section 1115 waivers submitted in 2000 or earlier. These average review times do not include preliminary discussions and reviews of draft proposals and concept papers that state and federal officials indicated occurred for varying lengths of time before formal application, depending on the particular waiver. The HIFA demonstrations approved for California and Arizona both allow expansions using unspent SCHIP funds, but the two differ in the populations to be added. The California waiver will add coverage for uninsured low-income parents, caretaker relatives, and legal guardians of children who are enrolled in Medicaid and SCHIP, testing whether covering these individuals will increase enrollment of eligible children and improve their continuity of care. The approved Arizona waiver will use unspent SCHIP funds to cover childless adults as well as parents of Medicaid and SCHIP children. HHS’s terms and conditions for the approved Arizona waiver specify that SCHIP children are the first priority for coverage, then parents of SCHIP- and Medicaid-enrolled children, and last priority, childless adults. Arizona was, however, allowed to retroactively cover childless adults effective November 2001, and parental coverage is not required until October 2002. In response to an objective of the HIFA initiative, both the Arizona and California waiver approvals include feasibility studies of whether and how an employer-sponsored insurance component might be incorporated into the demonstrations. The Utah waiver will expand coverage to some formerly uninsured adults for primary care and preventive services, but exclude other services, such as inpatient hospital and specialist care. In addition to enrollment fees and cost sharing for services used by this expansion population, the waiver will be funded by increased cost sharing and limits on some optional services for certain groups of currently eligible adults, including some with mandatory eligibility. Among the optional services being limited are mental health services, vision screening, and physical therapy. Illinois received approval for the first Pharmacy Plus waiver. The Illinois Senior Care program will expand pharmacy coverage to low-income seniors, most of whom participate in an existing state-funded pharmacy benefits program. The premise as to how the waiver program can be implemented without committing additional federal resources is that expanded access to medically necessary drugs will help keep seniors healthier and avoid medical expenses, including hospitalization and nursing home placement, that would reduce their incomes to the level of Medicaid eligibility. Table 1 presents highlights about the section 1115 waivers approved for Arizona, California, Utah, and Illinois. (See app. I for further details about these four waiver programs.) As of June 3, 2002, 9 of the 13 section 1115 waiver proposals to expand coverage and pharmacy benefits were still under review by HHS (see app. II for highlights of these proposals). Most were submitted since January 2002. These proposals included pending HIFA applications from Illinois, Maine, Michigan, and New Mexico. Three of these proposals would use unspent federal SCHIP funds to expand coverage to various groups, including children, parents, and in some cases, childless adults. Most of the HIFA applications require increased cost sharing for the expansion groups, and one proposal would reduce benefits for an optional eligibility group. One additional proposal under review from Washington, which was not submitted in HIFA format, would also expand coverage for uninsured individuals, including childless adults using unspent SCHIP funds. Four states—Connecticut, New Jersey, South Carolina, and Wisconsin— had pharmacy benefit waiver proposals under review that were consistent with the Pharmacy Plus concept. In all cases, pharmacy benefits would be expanded to low-income seniors who are not currently eligible for Medicaid, and the states would fold in participants from state-only funded pharmacy programs. HHS has not, with its recent approvals of waivers under the new flexibility initiatives, consistently ensured that waivers are in line with program goals and are budget neutral. Under the first approved HIFA waivers, HHS is allowing the use of unspent federal SCHIP funding to cover adults, including adults who have no dependent children. When the Congress established SCHIP, it required the Secretary to redistribute unspent funds to states that had exhausted their allotments to use for the program purposes of covering children. These waivers raise legal and policy concerns in light of SCHIP’s stated purpose of expanding health coverage to low-income children. Similarly, HHS did not adequately ensure that the waivers will be budget neutral. Our review of the documents supporting the traditional budget neutrality test used in the two states subject to this requirement—Utah and Illinois—found that HHS’s review process did not adequately ensure that the costs to the federal government for the Medicaid program would be no higher under the waivers than they would have been without the waivers. The approval of the Illinois waiver also raises questions about the potential financial risk for the state and implications for covered elderly beneficiaries, and the extent to which HHS is ensuring that waivers are fiscally sound. SCHIP is a program created specifically for low-income children. The program is designed to enable states to initiate and expand health assistance to low-income, uninsured children in an effective, efficient, and coordinated manner. In establishing SCHIP, the Congress directed that funds made available under the program be used only for program purposes. Further signaling the importance of spending SCHIP funds on uninsured children, the Congress also provided for the Secretary to redistribute states’ annual allotments remaining unspent after a 3-year period of availability to states that have exhausted their SCHIP allotments. In April 2002, CMS announced that 18 states and territories would receive $1.6 billion in reallocated funds because they had exhausted their own allotments. Given the statutory objective of reducing the number of uninsured children, however, HHS’s approvals of waivers that allow states to use unspent SCHIP funds on adults raise certain legal and policy questions about appropriate uses of the SCHIP allotments. In our view, HHS has not established that its approval of SCHIP funding for childless adults in Arizona was reasonable and, therefore, authorized. Arizona plans to use $126 million in unspent federal SCHIP funds for childless adults. In approving the Arizona waiver, HHS stated that the Arizona project would demonstrate whether covering single adults and childless couples will improve the overall health of the community and reduce overall rates of uninsurance, and asserted that this result would “promote the objectives of the Act.” However, HHS did not assert that insuring these childless adults would improve the provision of health assistance to low-income children. We are not aware of any basis for suggesting that the use of SCHIP funds to cover childless adults would promote the objectives of SCHIP. “the language of section 1115 permits approval of demonstration projects based on the overall purposes of all of the listed Social Security Act programs (rather than segregating each program). In other words, in approving a Medicaid or SCHIP demonstration, the Secretary may consider the likelihood of promoting the objectives of the programs authorized under any of the titles of the Social Security Act listed in section 1115.” The structure and language of section 1115 do not support HHS’s interpretation of its authority. Section 1115 identifies the titles of the Social Security Act for which demonstration projects may be authorized. It also lists the statutory provisions within each title containing the requirements or expenditure limitations that may be waived and clearly indicates that waiver of requirements or expenditure limitations are to correspond to the associated titles of the Social Security Act. As a result, we believe that section 1115 requires HHS to justify that a demonstration project will likely assist in promoting the objectives of the particular title of the Social Security Act in which the waived program requirements or expenditure limitations appear. With respect to programmatic requirements or expenditure limitations applicable to SCHIP funds, section 1115 requires HHS to establish that a demonstration project would promote the objectives of title XXI, which established SCHIP. As stated above, HHS has not asserted that the use of SCHIP funds to cover childless adults would promote the statutory objectives of the program, although it contends that the Arizona waiver, considered in its entirety, does serve program objectives. HHS’s interpretation of section 1115 effectively eliminates the distinctions among the programs authorized under the identified titles of the Social Security Act and would allow the agency to waive requirements or authorize otherwise impermissible expenditures under one program to promote the objectives of any other program. If HHS were to take this interpretation to an extreme, it could bypass funding limitations and mechanisms established for individual programs by funding any of the programs authorized in the identified titles of the Social Security Act with funds made available for any other title. This interpretation of section 1115 is particularly problematic in the context of SCHIP, given the congressional direction that allocated funds not spent for program purposes be redistributed to states that have exhausted their allotment. Arizona’s use of SCHIP funds for childless adults raises two additional concerns. First, Arizona had already received approval from HHS to use Medicaid funds to expand coverage to certain childless adults. As a result of the waiver, the federal government will now pay about 77 percent of the costs under the SCHIP matching rate, instead of about 66 percent if this same population was covered under Medicaid. Second, if Arizona expends all of its federal SCHIP allotment, it arguably could qualify for reallocated unspent federal SCHIP funds from other states. It could then apply these reallocated funds to childless adults. HHS’s approval of Arizona’s and California’s use of unspent federal SCHIP funds to cover parents illustrates the changing policy with regard to the use of waiver authority to allow states to cover adults. In creating SCHIP, the Congress authorized states to cover the entire family—both the parents or custodians and their children—if it was cost effective to do so. The cost-effectiveness test for family coverage specifies that the expense of covering both adults and children in a family must not exceed the cost of covering the children. Under these circumstances, achieving cost- effectiveness appears possible only when the cost to SCHIP of covering a family is subsidized by employer contributions or other state funds. This stringent cost-effectiveness test clearly showed congressional priority for covering children over their parents. However, we reported in 1999 that some states and advocacy groups were seeking increased flexibility to tailor their SCHIP programs to cover uninsured parents through the use of section 1115 waiver authority. CMS, then called the Health Care Financing Administration, had questioned requests for section 1115 waivers to cover parents during the first year of SCHIP’s implementation, expressing a concern that the SCHIP goal of providing insurance to low- income children should not be circumvented by the waiver process. The agency had indicated to states that the purpose of section 1115 waivers was to test innovative approaches and not to waive statutory provisions that the states found objectionable. In our first report on SCHIP implementation in 1999, we noted that, as of April 1, 1999, only two states had been able to demonstrate cost-effectiveness and had received approval to use SCHIP funds to cover adults in families with children. Since our earlier report, HHS has changed its policy and no longer requires that states demonstrate the cost-effectiveness of family coverage in section 1115 waiver proposals. On July 31, 2000, HHS announced to states that it would consider section 1115 waivers to use unspent federal SCHIP funds to cover parents of SCHIP- and Medicaid-eligible children, but was silent on the application of the cost-effectiveness test. Since this announcement, four states, in addition to Arizona and California, have requested and obtained approval for these types of waivers. In our view, this change raises broad policy questions about the use of section 1115 authority to waive those statutory requirements that states have found objectionable but that the Congress put in place clearly to demonstrate the priority of SCHIP to fund insurance coverage for children. It further raises the issue of which statutory objectives should take precedence—the Congress’s direction to allow family coverage only if states could demonstrate its cost-effectiveness, or the Secretary’s authority under section 1115 to allow states to spend money on individuals other than children. Our review of the supporting documentation for the Utah and Illinois waiver approvals found inadequate justification that the waivers would be budget neutral—that is, the initiatives would result in no more cost to the federal government than under the existing program. To establish that a waiver is budget neutral, HHS requires the state to compare estimated program costs under two scenarios: (1) costs if the existing program was continued (“without-waiver” costs) and (2) costs with the new waiver program (“with-waiver” costs). We found that the states’ estimates of without-waiver costs included inappropriate costs in Utah and impermissible costs in Illinois. Including these amounts inflated each state’s estimate and inappropriately increased the amount the federal government could pay in the absence of the proposed waiver. Utah’s without-waiver estimate was inflated because it included the estimated cost of services for a new group of people who were not being covered under the existing Medicaid program. By including these costs, the state in effect inflated the without-waiver costs by about $59 million— 10 percent—over the 5-year life of the waiver. Without this amount, Utah’s waiver would not be budget neutral. The costs for this group were included based on the “hypothetical population” concept, under which HHS has previously allowed states to include the costs of populations that they could have hypothetically covered under Medicaid as an optional group, but did not actually cover. In 1995, we reported that states were using this hypothetical argument to justify higher without-waiver costs, making budget neutrality easier to achieve. We concluded that, because state officials indicated that cost containment was a primary consideration in seeking section 1115 waivers, it was questionable that these states would have added optional eligibility groups to their Medicaid programs without the waiver. For Utah, however, the use of this methodology goes beyond our earlier concern because the group in question does not meet the criteria for designation as a hypothetical population. The group could not have been covered without a waiver, because it will receive a limited primary-care-only benefit package that would not be allowed under Medicaid’s rules for comprehensive coverage. During the review process, some officials within HHS voiced concerns about allowing the use of this methodology; however, the waiver was still approved by HHS as a matter of policy. Illinois’s without-waiver estimate was inflated for a different reason: it failed to account for mandatory reductions in program costs planned for the 5-year course of the waiver. These reductions pertain to the state’s use of upper payment limit (UPL) arrangements. We and the HHS Inspector General have reported numerous times about state funding arrangements that inappropriately generated excessive federal matching funds, including UPL abuses. The Congress and HHS subsequently revised the upper payment limits and required states to reduce their claims for these excessive payments over the next several years. Over the course of its 5- year waiver, Illinois will have to reduce its claims by $1.4 billion in accordance with these requirements. Over this time period, the state’s total payments to the facilities involved in the UPL arrangements will decline by 39 percent. Based on this decrease, we estimate that at least $275 million in impermissible UPL expenses are included in the estimate. This occurred because Illinois’s calculations of without-waiver costs did not reflect the required reduction in UPL expenses. Rather, the Illinois without-waiver cost estimate projected increases in UPL payments by 51 percent over the 5-year life of the waiver. It appears that, in reviewing Illinois’s budget neutrality justification, HHS did not consider the extent to which any UPL-related impermissible funds were included. The Secretary has the authority, however, to revisit this decision and to require the state to recalculate its estimated without-waiver costs to appropriately account for the reduction in the amount of UPL expenses. We have previously reported similar concerns with the approval of demonstration waivers that were not budget neutral and that could increase federal Medicaid expenditures. In our 1995 report, we found that, contrary to the administration’s assertion, the approved spending limits for demonstration waivers in Oregon, Hawaii, and Florida were not budget neutral. At that time, we warned that the granting of additional section 1115 waivers merited close scrutiny in part because of the potential budgetary impact. Another concern related to HHS’s approval of the Illinois waiver is the extent to which the agency’s oversight ensures that approved waivers are fiscally sound, in particular related to their likelihood of achieving projected savings. This concern is separate from budget neutrality; it centers instead on whether the waiver project is placing the Medicaid or SCHIP programs in a vulnerable position. The waiver may put Illinois at financial risk even if federal budget neutrality is maintained. A major premise behind this initiative is that the prescription drug benefit will pay for itself by preventing low-income elderly individuals from becoming Medicaid eligible because of high health care costs, such as those for hospital and nursing home care. The Congressional Budget Office (CBO), OMB, and CMS’s own actuary, however, have not accepted this premise, in assessing the cost of a Medicare prescription drug benefit. There are many reasons for this caution. According to a preliminary assessment by CBO, Medicare beneficiaries without any drug coverage already consume a large number of prescription drugs, and any additional or more expensive drugs beneficiaries might receive in gaining coverage would probably provide less-dramatic improvements in health than the drugs they are already taking. CBO’s assessment stated that greater use of drugs, especially in an older population, would increase the chances of side effects, allergic reactions, medication errors, and other adverse drug events, which could increase the use of hospitals, emergency rooms, and other health care services. CBO found that research indicating there might be some savings in providing a Medicare prescription drug benefit have been difficult to interpret, and concluded that the magnitude of any savings would probably be quite small. CBO stated that recent evidence has suggested that the net effect of providing coverage may be to lower the cost of other services, but that the studies are difficult to interpret, especially in the context of a Medicare drug benefit, and that more evidence is expected from evaluations of state-level drug programs for low-income elderly people. While Illinois’s approved waiver is intended to evaluate the extent to which a drug benefit may be able to generate cost savings, it makes several risky assumptions with regard to the extent of savings, potentially setting a precedent for other states’ Pharmacy Plus proposals. In Illinois, many of the people who would gain drug coverage under the waiver are already receiving some drug coverage benefits under an existing, more limited, state-funded program. Despite this, the success of the Illinois waiver relies on assumptions that (1) providing the expanded prescription drug benefit under the waiver will divert 7,500 people by keeping them from becoming Medicaid-eligible, when an estimated 20,000 elderly individuals normally enter Medicaid in a given year, (2) this high diversion rate will occur immediately, the first year that the drug benefit is provided under the waiver, and (3) once diverted, aged individuals would stay out of Medicaid for at least 5 years. The waiver’s underlying assumptions offer little margin of error. For example, if only half of the projected number of seniors are diverted in the first year of the waiver, we estimate that the cost of the waiver could increase by $339 million. The implications for elderly Medicaid beneficiaries of not achieving the high rate of savings could be significant. HHS limited total federal risk for this waiver by establishing an aggregate “cap” for payments to the state for all services to the elderly, including the drug benefit. However, this cap also means that once the state has spent up to this limit then it cannot receive additional federal matching funding for Medicaid services for the elderly. One assessment of the Illinois financing approach noted that, for any number of reasons, Illinois could find the costs of operating its new drug program or of serving elderly Medicaid beneficiaries to be higher than expected. If the state is unable to achieve savings from diverting people from Medicaid, then as Illinois officials acknowledge, it may need to choose other options. Such options could include cutting spending on elderly Medicaid beneficiaries, cutting spending on its prescription drug program, or paying for any unanticipated program costs entirely with state funds. The state could also roll back eligibility for optional elderly beneficiaries, increase cost sharing, reduce provider reimbursement rates, reduce the size of the waiver benefit, or eliminate the waiver altogether. HHS officials stated that this approval represents a true demonstration or policy experiment, in that the waiver will test whether it is possible to provide a drug benefit without increasing costs. Officials also pointed out that the federal risk was limited by the aggregate cap approach. As indicated earlier, four states have pending waiver proposals similar to Illinois’s Pharmacy Plus waiver. HHS has not consistently followed its stated policy to ensure that people who may be affected by waivers have the opportunity to learn about and comment on waiver proposals. Recognizing that people who may be affected by a demonstration project “have a legitimate interest in learning about proposed projects and having input into the decision-making process,” HHS established policies and procedures in a 1994 Federal Register notice for both a federal- and state-level public notice and comment process. HHS has not provided a federal level notice and comment period in line with the policy since 1998, and instead has relied on states to have a public process. The extent of public input varied greatly among the four states with recently approved waivers. Although HHS recently affirmed the public input requirements for states, its new streamlined review process under HIFA may not be sufficient to guarantee effective public involvement at the federal level. The 1994 notice specifies HHS’s intent to publish regular notices of all proposals for section 1115 waivers it receives and to allow a 30-day period to receive and review written comments before taking official action. The notice describes the policies and procedures HHS will be guided by when reviewing section 1115 applications, but is not legally binding. We found that the last Federal Register notice of a section 1115 application submission and 30-day comment period was published in 1998. According to an HHS official, the current agency policy does not include publication of notices with a 30-day comment period while applications are under review at HHS because the states are considered to be a more appropriate forum for public input. Our discussions with HHS officials during the spring of 2002 indicated that current agency policy was not to release copies of pending waiver applications to interested parties, but to refer them to states. In May, the Secretary stated that the agency would publish waiver applications and background information on its Web site as soon as possible after receipt; HHS officials subsequently clarified to us that this includes applications that have been formally submitted but not yet approved. We were able to find copies of all but one of the pending HIFA proposals on CMS’s Web site, along with CMS contact names and phone numbers for each proposal. However, copies of any Pharmacy Plus or other section 1115 proposals that were not in the HIFA format were not yet available on the CMS Web site. One problem with HHS’s decision to defer to the states is that states have not always released copies of pending waivers when requested by interested parties. Advocates reported such difficulty obtaining a copy of Arizona’s waiver application that one organization requested a copy from HHS under the Freedom of Information Act (FOIA) after the application had been submitted for review. The FOIA request was made on November 15, 2001, and the agency responded in January 2002 stating that it was responding to requests in order of receipt and would notify the requester “as soon as possible” about the availability of the documents. Meanwhile, the waiver had already been approved in December 2001. The approved waiver is now posted on the agency’s Web site, but was not available to the public during the time it was under review. The 1994 policy contains provisions for state-level public participation, including a list of one or more approaches states are expected to follow. These include public meetings with copies of the proposal and opportunities to using a commission where meetings are open to the public; legislation containing the outline of the waiver proposal; formal notice and comment through the state’s administrative procedures act with notice given at least 30 days prior to submission of the waiver; publication of notice in a newspaper of general circulation including information on how to obtain a copy and submit comments, with a comment period of at least 30 days; or any similar process providing an opportunity for interested parties to learn about and comment on the proposal. Such state-level activities allow the public to be informed of and comment on proposed demonstration programs, but do not necessarily guarantee consensus on a state’s planned waiver. We found wide variation in the approaches and level of effort states made to seek and incorporate public comment on written copies or descriptions of the waiver proposals, as well as the degree of controversy concerning the state proposals, as illustrated in the following examples. California had an extensive public process as well as a statute providing authorization to seek a waiver. In addition, California conducted extensive outreach activities, including mailing hundreds of copies of the waiver application and soliciting comments, holding public hearings, and presenting the approach at a special legislative hearing. Illinois, like California, had a statute authorizing the state to seek a waiver for the pharmacy program expansion, which allowed the state to claim federal financial participation. The interest groups we contacted did not raise concerns about the adequacy of the public process. Utah provided opportunity for groups to discuss the proposed waiver through meetings that state officials held with provider groups and committees involved with improving health coverage in the state. Despite these meetings, advocates and others indicated that in their view the public process was inadequate given the significance of the state’s proposal and planned tradeoffs. Participants in some of these meetings indicated they had little or no opportunity to formally comment on and influence the waiver proposal. Among other issues, advocates and providers expressed concern about reduced optional benefits and increased cost sharing for current beneficiaries, the planned enrollment fee and co-payments, and lack of specialty services and inpatient hospital coverage for the waiver expansion population. Specialty physicians and hospitals would be expected to contribute their services on a volunteer basis, and community health centers would receive lower payments for the expansion group. After the waiver was approved, state officials indicated that inpatient hospital specialty physician services would be reimbursed, with state-only funds, under certain circumstances. Arizona did not release copies of its proposal until after it was approved. Officials indicated that this was because they were negotiating the waiver with HHS and did not want to release a document that was changing. Arizona’s HIFA waiver application stemmed from a proposition approved by state voters in 2000 to extend Medicaid coverage to low-income childless adults, and a state law enacted in spring 2001 to provide coverage to parents of SCHIP- and Medicaid-eligible children. Although the HHS policy lists legislation as an acceptable way to fulfill the public process requirement, there was a significant change in Arizona’s waiver application request from what was originally authorized. The section of the HIFA waiver covering childless adults with SCHIP funding was not included in the state statute or otherwise made public before the waiver was approved. HHS’s new initiatives further reduce the information states must provide on the extent of their public process. Prior to HIFA, states were required to indicate in their section 1115 applications specifically how they complied with HHS’s policy for a public process. The 1994 policy directed states to include a narrative description of their public process with their applications, which became part of the administrative record for the waiver’s approval. Such documentation provided a basis for HHS to determine whether the state provided an effective notice and comment process. Consistent with the agency’s commitment to streamlining the waiver approval process, the HIFA waiver application template allows states to simply check a box indicating that they followed a public process that allowed beneficiaries and other interested stakeholders to comment on the proposal. No description of the state’s public process is required. HHS has recently emphasized to states that a public process is a priority, but has not similarly committed to a federal-level process. On May 3, 2002, CMS sent a letter to all state Medicaid directors encouraging the use of a public participation process, and stating that the agency would continue to review section 1115 waiver applications to ensure adherence to the 1994 policy. The letter did not, however, indicate that HHS intended to address public input at the federal level in line with its stated policy. The extent to which HHS’s notice to states will ensure a process that provides for appropriate public input and consideration of comments remains to be seen. Concerns about the lack of an appropriate public process have been voiced in other states with pending HIFA waivers. In providing section 1115 program demonstration authority under the Social Security Act, the Congress has indicated its willingness to allow states to experiment with innovative approaches in certain public programs to enhance their reach and effectiveness, including coverage of populations that might otherwise be ineligible for those programs. Over the years, many uninsured people in various states have benefited from such experimentation, receiving health insurance coverage otherwise unavailable to them. Using this same authority, HHS has recently committed to work with states to provide additional flexibility and more expedited approvals, including developing specific initiatives, such as HIFA and Pharmacy Plus. While only a handful of demonstrations have been approved to date, several other states have similar waivers under consideration that will likely be influenced by prior decisions and precedents. Our review of recently approved waivers, however, raises certain legal and policy concerns that indicate the need to clearly establish purposes and populations for which SCHIP funds may be spent. While section 1115 authority provides the Secretary with broad discretion in approving demonstrations that further the program’s objectives, it also creates the opportunity for HHS to approve state-operated programs that may not be consistent with program objectives established by the Congress. In exercising the section 1115 authority available for the SCHIP program, recent HHS approvals have allowed SCHIP funds to be spent on individuals other than the statute’s stated target population: uninsured low-income children. At issue is the appropriateness of covering two distinct groups of adults: childless adults and parents or other custodians of SCHIP- and Medicaid-eligible children. With respect to childless adults, we believe that HHS has not presented a reasonable basis for authorizing states to cover childless adults under SCHIP. Furthermore, allowing states to cover parents with SCHIP funds without demonstrating its cost effectiveness allows limited program funds to be spent on individuals not targeted in the statute. In this regard, it is not clear which statutory objectives should take precedence—those of the SCHIP statute, which allows for family coverage only to the extent that it does not exceed the cost of insuring eligible children, or section 1115 authority, which allows certain statutory provisions—such as cost-effectiveness tests—to be set aside. Flexibility and program experimentation must be accompanied by accountability, as the HIFA name implies. Fiscal accountability is an important aspect of the Medicaid and SCHIP federal-state partnerships to ensure, among other things, that both the federal and state governments pay their fair share of program costs. We found, however, that HHS’s review did not adequately ensure that two newly approved waivers were budget neutral, as required as a condition of section 1115 waiver approvals, because their ceilings included inappropriate or impermissible costs. Consequently, these waivers have put the federal government at increased financial risk. HHS approval of waivers that were based on use of inappropriate methods for demonstrating their budget neutrality is not a new problem, as we have earlier reported. However, as more states pursue additional flexibility in their Medicaid and SCHIP programs, HHS has an opportunity—if not an obligation—to develop more specific and consistent criteria on acceptable methodologies to predict permissible future costs and to ensure greater accountability in guarding against inappropriate federal financial risk. Accountability should also entail a process of public input that is adequate to allow for the expression of issues and concerns that affected parties may have. Expediting the waiver review and approval process is an important goal. But it is also important to allow for public input into new and pending program proposals to help assure that proposals are consistent with overall program goals and that the benefits of waiving certain provisions justify forgoing their original purposes. Doing so at the state level facilitates informing those potentially most affected by new program approaches. However, a federal-level notice and comment opportunity is also important because approved waivers represent federal policy that may have influence beyond a single state. It also provides for a more visible and transparent process for all affected and interested parties, including the Congress—something that may be better accomplished at the federal level. For these reasons, we believe there is a need to adhere to some minimal federal input process for waiver proposals, such as the HHS policy established in 1994—in response to earlier concerns about the lack of an open process—that provided for notification in the Federal Register and a 30-day comment period. We believe the Congress should address three issues we identified in the course of our work. Two issues pertain to the availability of SCHIP funding to provide health insurance coverage to two distinct groups of adults: childless adults and parents or guardians of SCHIP-eligible children. The third pertains to the need for an improved federal-level process for public notification and input for state applications for Medicaid and SCHIP section 1115 demonstration projects. In our view, HHS’s use of section 1115 authority to allow states to use SCHIP funds to cover childless adults is not consistent with the program’s statutory objectives to expand health coverage to uninsured, low-income children. Therefore, SCHIP funds should not be available for this purpose. Further, states’ use of SCHIP funds to cover childless adults decreases the amount of unspent SCHIP funds available for redistribution in future years to states with unmet SCHIP needs. HHS disagrees with our view, asserting that the objectives of the Arizona HIFA waiver must be viewed as a comprehensive approach in providing health insurance coverage to those who were previously uninsured, including childless adults and parents. Because of the difference in our positions on whether SCHIP funds are available to cover childless adults, we are raising this to the attention of Congress for resolution. Resolving this issue is important not only for the Arizona waiver but also because of the precedent it sets for additional pending section 1115 demonstration applications currently under consideration and for the future availability of SCHIP funds for uninsured, low-income children. Therefore, the Congress should consider amending title XXI of the Social Security Act to specify that SCHIP funds are not available to provide health insurance coverage for childless adults. In addition, the Congress should establish, for parents or guardians of SCHIP-eligible children, which statutory objectives should take precedence—those of title XXI, which allow for family coverage only to the extent it does not exceed the cost of insuring eligible children, or section 1115 authority, which allows certain statutory provisions—such as cost-effectiveness tests—to be set aside. The Congress should also consider requiring the Secretary of HHS to improve the public notification and input process at the federal level to ensure that beneficiaries and groups affected by Medicaid and SCHIP section 1115 demonstration waiver proposals receive opportunity to review and comment on proposals before they are approved. To ensure that SCHIP funds are spent only for authorized purposes, we recommend that the Secretary of HHS amend the approval of Arizona’s HIFA waiver to prevent future use of SCHIP funds on childless adults, and deny any pending or future state proposals to spend SCHIP funds for this purpose. To meet its fiduciary responsibility of ensuring that section 1115 waivers are budget neutral, we recommend that the Secretary of HHS better ensure that valid methods are used to demonstrate budget neutrality, by developing and implementing consistent criteria for consideration of section 1115 demonstration waiver proposals, and reconsider Utah and Illinois’s budget neutrality justifications, in light of our conclusions that certain costs were inappropriate or impermissible and, to the extent appropriate, adjust the limit on the federal government’s financial obligation for these waivers. To improve the opportunity for public input into HHS consideration of state Medicaid and SCHIP program proposals that waive statutory requirements, we recommend that the Secretary of HHS provide for a federal public input process that includes, at a minimum, notice of pending section 1115 waiver proposals in the Federal Register and a 30-day comment period in line with HHS’s 1994 policy. We provided a draft of this report for comment to HHS, OMB, Arizona, California, Illinois, and Utah. OMB and California declined to provide written comments. In its general comments, HHS emphasized that increasing access to health insurance and providing prescription drugs to senior citizens are among its top priorities, and that given the current state of the economy, its actions to increase coverage through waivers are appropriate if not imperative. HHS also highlighted its history of using section 1115 waivers in the Medicaid program to expand health insurance coverage for individuals who would not otherwise be eligible for the program. HHS also commented that, since January 2001, the agency has approved nearly 1,800 Medicaid and SCHIP state plan amendments, managed care waivers, home- and community-based waivers, and section 1115 waivers and amendments, but noted that, because of the scope of our study, our report focused on only 4 of them. We reviewed new section 1115 demonstration waivers in line with the goals of HHS’s new HIFA and Pharmacy Plus initiatives—initiatives of particular interest because of the significance of their goals and HHS’s plans to grant states new flexibility to achieve them—and only 4 had been approved at the time we conducted our work. We also considered, in addressing certain issues such as budget neutrality, earlier HHS actions and our own prior work. HHS disagreed with each of our three recommendations for executive action. Arizona, Illinois, and Utah also disagreed with various aspects of our findings leading to these recommendations. A summary of their concerns and our evaluation follows. HHS’s and states’ comments are included in appendixes IV through VII. With regard to our recommendation that the Secretary amend the approval of Arizona’s HIFA waiver to prevent future use of SCHIP funds on childless adults, and deny any pending or future state proposals for this purpose, HHS commented that our analysis was extremely narrow and did not recognize that the approval of the Arizona HIFA waiver promotes the objectives of SCHIP by providing health insurance coverage to those who were previously uninsured. HHS and Arizona both commented that the approved section 1115 SCHIP demonstration waiver prioritizes spending SCHIP (title XXI) funds for children. States are not permitted to limit or cap children’s enrollment, and are required to ensure the availability of funds for children over funding adult expansion populations. We revised the report to better clarify these priorities and requirements for the Arizona waiver. HHS also noted that there were no states that were entitled to redistributed SCHIP funds that did not receive such funds as a result of expenditures on section 1115 demonstrations. We acknowledge that covering the uninsured is an important public policy goal and that HHS has established coverage of children as a priority for use of SCHIP funds in the Arizona waiver terms and conditions. We also acknowledge that states that received redistributed funds in 2002 were not affected by HHS’s approval of the Arizona waiver. However, any unspent SCHIP funds available for redistribution to states in future years to cover uninsured low-income children would be reduced because of the Arizona approval, and any similar approved state proposals. We continue to believe that neither HHS nor Arizona has adequately explained how the objectives of the SCHIP statute—to provide health assistance to uninsured low-income children—is promoted by insuring childless adults. In its comments, HHS introduced a new rationale for this approval: that these adults could become parents or caretaker relatives in the future. This statement does not clarify how SCHIP funds used for this purpose would likely support the program’s objectives. To the contrary, HHS’s assertion that it may use SCHIP funds for childless adults suggests that it could approve virtually any demonstration project and, thus, effectively eliminates the requirement that section 1115 demonstration projects be likely to promote the objectives of the particular program for which they are authorized. Similarly, HHS’s discussion of the broader community benefits of the Arizona HIFA waiver does not clarify how it would likely promote the provision of health assistance to low-income children. In its detailed comments (number 12), HHS indicated that our discussion of the scope of the Secretary’s authority under section 1115 is unnecessary and overbroad in view of the HHS position that the Arizona HIFA waiver—in its entirety—will promote SCHIP objectives. As indicated, our discussion was included in response to HHS’s position that the Secretary need not exercise the section 1115 waiver authority on a program-by-program basis. Because our positions differ on whether SCHIP funds are allowable for this purpose, we believe it is important for the Congress to address this issue. Resolving it is also important because the Arizona waiver approval sets precedent for future waiver approvals and funding commitments that could potentially impact on SCHIP funds available for redistribution to states with unmet SCHIP needs. As a result, we elevated this issue to a matter for congressional consideration. Neither HHS nor the states commented on the draft report’s matter for congressional consideration concerning the use of section 1115 authority to approve spending SCHIP funds on parents or guardians of SCHIP- eligible children without regard to the statutory cost-effectiveness test. HHS, Utah, and Illinois disagreed with our findings supporting the recommendation that the Secretary better assure that valid methods are used to demonstrate budget neutrality. For Utah’s estimate, HHS and Utah stated that the methods used to assure budget neutrality were valid. They commented that including the costs of a hypothetical population in the without-waiver costs was appropriate because the state has “current law” flexibility to cover that population at its own option, that is, the state could have covered the expansion population through its Medicaid program and thus should be allowed to consider the associated costs of their coverage as without waiver costs. We continue to maintain—despite HHS’s disagreement both currently and in response to our 1995 report—that states should not be allowed credit for the costs of covering certain hypothetical populations in their without-waiver cost estimates. Indeed, the Medicaid statute provides states wide latitude in terms of covered populations and services and payment rates for those services, and the federal government will pay its share of covered expenditures in an open- ended manner when the states cover the services under their state Medicaid plan. If states choose, however, to pursue broader authority under section 1115, they are required to meet the budget neutrality test. In the case of Utah and other states we have examined in the past, states had previously chosen not to cover such optional populations. In our view, to allow the inclusion of hypothetical costs for hypothetical populations not previously covered—in an attempt to demonstrate budget neutrality of new section 1115 demonstration proposals—turns the test of budget neutrality into a rather hollow exercise. Regarding our conclusion that HHS allowed Illinois to include impermissible UPL costs in its baseline, HHS and Illinois each raised a different concern. HHS indicated that the final regulation implementing the UPL reduction was not in place at the time of the Illinois waiver approval. We disagree. The final rule that set new UPLs for nonstate- governmental facilities, including a 150-percent UPL for nonstate- government-owned hospitals and a mandated phase-out of payments above this limit, was published in January 2001 and effective March 2001, well before the Illinois waiver was approved in January 2002. A second rule, to which HHS may have been referring, reduced the UPL for nonstate-government-owned hospitals from the 150-percent level to 100 percent of what Medicare would pay and was effective May 2002. We revised the report to clarify the effective dates of these two rules. HHS in its comments recognized that the UPL reduction may now apply, and indicated that it was reviewing the budget neutrality cap in light of the new rules. Illinois disputed that its budget neutrality projections are inflated by impermissible costs. The state said that other spending authority found in the Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act (BIPA) could have been used by the state in its waiver projection which would have offset the impact of the inappropriately included UPL funds. Illinois officials indicated that these costs that could be incurred in future years should have been considered in our assessment of their without-waiver estimate. However, the budget neutrality justification that Illinois submitted to, and was approved by, HHS did not include these hypothetical costs in the ceiling. The state in its comments did not provide any evidence that it intended, in the absence of the waiver, to modify its program so that some of these hypothetical costs would be incurred by the population covered by the waiver. Illinois officials also indicated that, even if these BIPA-related costs were not considered, that several technical corrections should be made to our estimate of impermissible costs. After the state provided additional documentation for its budget neutrality analysis, we adjusted our estimate of impermissible UPL costs accordingly, to $275 million from $356 million. We note, however, that our methodology and estimate are conservative. We reduced the amount of UPL payments included in the without-waiver estimate at a lower rate than what would actually occur, because the detailed data needed to determine the actual and higher rate of reduction were not available at the time of our review. We maintain that our estimate, which remains higher than the estimate that the state developed using its own calculation, is a reasonable approximation of the impermissible costs included in Illinois’s justification, and that HHS should revisit the Illinois budget neutrality justification and source documentation in light of this finding as it has committed in its comments to do. Illinois and HHS also disagreed with our conclusions about the fiscal soundness of the Illinois Pharmacy Plus demonstration, restating that the premise that the low-income elderly who are provided prescription drug coverage will be less likely to become eligible for the Medicaid program is valid. Illinois stated that our report fails to cite any of the studies that show drug coverage can reduce other medical costs. In the course of our work, we reviewed all of the supporting research that Illinois cited in its waiver application. While the cited studies indicated that access to prescription drugs yielded positive health benefits for people in poor health, all of them focused on access for people already diagnosed with specific conditions, such as diabetes, heart disease, and human immunodeficiency virus (HIV). In our view, the cited research did not sufficiently support Illinois’s theory that a full pharmacy benefit for the general near-poor elderly population will yield the amount of savings that the state depends on for its budget neutrality commitment. Illinois also commented that we did not identify the full range of actions the state could take should its estimated savings not materialize, such as establishing an enrollment cap for the waiver population or increasing cost sharing. We modified our report to clarify this point. We do not question that some savings from providing a prescription drug benefit to low-income elderly may be realized and agree that the premise may be appropriate for an evaluation. Our major observation remains— that HHS is allowing a high level of risk for the state and its elderly beneficiaries in the Illinois demonstration, given the specific assumptions the state has made regarding the substantial savings it expects to gain from offering a drug benefit to this elderly low-income population. The state assumes that a drug benefit can largely pay for itself by diverting thousands of people from becoming Medicaid-eligible and from entering nursing homes. The state assumes this high diversion rate even though the majority of the people expected to be covered under the waiver already receive some drug benefit, albeit a more limited one, under the state’s existing drug program. A broader point, as we report, is that the diversion premise is being accepted and applied on a broad scale before its validity is tested. HHS has encouraged states to submit Pharmacy Plus waivers and several have done so. HHS disagreed with our recommendation that the Secretary of HHS should improve the federal public process, commenting that the current opportunity for public comment in the waiver process is more than adequate at both the federal and state levels. HHS stated that CMS currently posts some proposals on the CMS Web site, such as HIFA proposals, and intends to post all pending and approved proposals on the Internet in the future. However, HHS did not specify when in the future it would do so. When we checked CMS’s Web site, we were able to find copies of all but one of the pending HIFA proposals, but none of the Pharmacy Plus proposals and none of the pending proposals requesting section 1115 waiver authority that were not presented in the HIFA standard format. Consequently, reliance on the Web site provides an incomplete source of public information and does not substitute for the widely accepted Federal Register notice process. Our broader point remains that because of the variation in the level of public process at the state level, and because a waiver approval in one state sets precedent for others, a more formal and consistent federal approach is needed to ensure that people potentially affected by waivers are aware of the proposals and have a structured venue for providing input prior to their approval. It would also provide a centralized focus on issues of national public policy interest for the Medicaid and SCHIP programs that is otherwise absent when relying on individual states as the focal point for public dialogue. Because HHS disagreed with our recommendation to improve the public notification and input process at the federal level, we elevated this issue to a matter for congressional consideration. Utah suggested that we reconsider the discussion in the draft report of the state’s public process and the concerns raised at the state level with its waiver. The state indicated that the concerns expressed about the waiver were apart from whether there was appropriate notice and opportunity for comment. We agree and have revised the report accordingly. We have retained, however, some discussion of the concerns with the waiver that groups we contacted felt were not adequately considered during the state’s public process. We believe it helps demonstrate the importance of public input, particularly when proposed demonstration projects are viewed as controversial. HHS and the states provided other comments that were not specific to our recommendations. Illinois and Utah expressed concerns that the report implied that HHS’s expedited review was too fast to provide an adequate review. Utah, for example, indicated that much negotiation between the state and HHS took place before the waiver was formally submitted. It was not our intent to link the amount of time that applications were under consideration with the results of HHS’s approval process for individual waivers. We revised the report to reflect that more time may be spent than indicated by formal approval times, because states and HHS may negotiate waiver proposals prior to their formal submission. We note, however, that beneficiary advocates raised concerns that these “behind-the-scenes” negotiations also result in less public awareness and scrutiny of the specific components of the proposals and that the expedited review times of the formal proposals may leave less time for public input and discussion of the written proposals. We believe that these concerns further support the need for a public process at the federal level once the state has submitted its proposal, to ensure adequate public notification of the proposals’ specific components. Finally, HHS provided additional technical comments. We revised the report to address these comments as appropriate. As arranged with your offices, unless you release its contents earlier, we plan no further distribution of this report 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 and Medicaid Services, the Director of the Office of Management and Budget, and others who are interested. 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 have any questions, please contact me at (202) 512- 7119. Another contact and other major contributors are included in appendix VIII. As of May 1, 2002, HHS had approved 4 of the 13 section 1115 new demonstration waivers submitted and under review since August 2001. These include the first 2 HIFA waivers, for Arizona and California; the expansion of primary care for uninsured individuals in Utah; and the first Pharmacy Plus waiver for Illinois. The table below provides further specific details about these 4 approved waivers. Nine of the 13 section 1115 waiver applications submitted since August 2001 to expand coverage for the uninsured and pharmacy benefits were still under review by HHS as of June 3, 2002. These proposals—including 4 HIFA applications, 1 uninsured expansion not in HIFA format, and 4 pharmacy proposals—are briefly described below. In addition to those named above, Tim Bushfield, Helen Desaulniers, Behn Miller, Amy Murphy, Suzanne Rubins, Ellen M. Smith, and Stan Stenersen made key contributions to this report. 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. Medicare and Medicaid: Implementing State Demonstrations for Dual Eligibles Has Proven Challenging. GAO/HEHS-00-94. Washington, D.C.: August 18, 2000. Children’s Health Insurance Program: State Implementation Approaches are Evolving. GAO/HEHS-99-65. Washington, D.C.: May 14, 1999. State Medicaid Financing Practices. GAO/HEHS-96-76R. Washington, D.C.: January 23, 1996. Medicaid: Spending Pressures Spur States Toward Program Restructuring. GAO/T-HEHS-96-75. Washington, D.C.: January 18, 1996. Medicaid Section 1115 Waivers: Flexible Approach to Approving Demonstrations Could Increase Federal Costs. GAO/HEHS-96-44. Washington, D.C.: November 8, 1995. Medicaid: State Flexibility in Implementing Managed Care Programs Requires Appropriate Oversight. GAO/T-HEHS-95-206. Washington, D.C.: July 12, 1995. Medicaid: Statewide Section 1115 Demonstrations’ Impact on Eligibility, Service Delivery, and Program Cost. GAO/T-HEHS-95-182. Washington, D.C.: June 21, 1995. Medicaid: Spending Pressures Drive States Toward Program Reinvention. GAO/T-HEHS-95-129. Washington, D.C.: April 4, 1995. Medicaid: Spending Pressures Drive States Toward Program Reinvention. GAO/HEHS-95-122. Washington, D.C.: April 4, 1995. Medicaid: Experience With State Waivers to Promote Cost Control and Access to Care. GAO/T-HEHS-95-115. Washington, D.C.: March 23, 1995. Medicaid: States Use Illusory Approaches to Shift Program Costs to Federal Government. GAO/HEHS-94-133. Washington, D.C.: August 1, 1994.

Summary: States provide health care coverage to about 40 million uninsured, low-income adults and children under two federal-state programs--Medicaid and the State Children's Health Insurance Program (SCHIP). To receive federal funding, states must meet statutory requirements, including providing certain levels of benefits to specified populations. Under section 1115 of the Social Security Act, the Secretary of Health and Human Services (HHS) can waive many of the statutory requirements in the case of experimental, pilot, or demonstration projects likely to promote program objectives. Since August 2001, HHS has approved four of 13 waiver proposals from states to either expand health insurance to uninsured populations or extend pharmacy coverage to low-income seniors, consistent with the new goals. Of the nine proposals still under review, five seek to expand coverage to uninsured populations, while four would provide pharmacy benefits for low-income seniors. GAO has both legal and policy concerns about the extent to which the approved waivers are consistent with the goals and fiscal integrity of Medicaid and SCHIP. The legal concern is that HHS has allowed Arizona to use unspent SCHIP funding to cover adults without children, despite SCHIP's objective of expanding health coverage to low-income children. GAO found that HHS' approval of the waiver to cover childless adults is not consistent with this objective, and it is not authorized. A related policy concern is that HHS used its waiver authority to allow Arizona and California to use SCHIP funds to cover parents of SCHIP and Medicare-eligible children with no regard to cost effectiveness when the statute provides that family coverage may be provided only if it is cost-effective to do so--that is, with no additional costs beyond covering the child. An opportunity for the public to learn about and comment on pending waivers has not been consistently provided in accordance with policy adopted by HHS in 1994. At the federal level, since 1988 HHS has not followed established procedures to publish notification of new and pending section 1115 waiver applications in the Federal Register with a 30-day comment period.